Many dairy farmers were justifiably frustrated during the initial height of the pandemic this spring as their milk struggled to get to consumers. Masses of shoppers returned to the basics, and milk shortages forced quite a few stores to limit dairy purchases — in some places, that even lead to higher consumer costs for the milk, butter, or cheese they wanted.

Simultaneously, the prices farmers were getting paid for their milk were plummeting. So where was that extra consumer money going?

On the July 9 Hoard’s Dairyman DairyLivestream, a pair of grocery experts tackled this issue with what they saw on the front lines. Dairy economist Mark Stephenson kicked off the discussion by pointing out that it’s challenging to think about all of the additional costs the pandemic has imposed. “It’s not just been at one point in the supply chain; it’s been all the way up through it,” he added.

Employee requirements
At the store level, those additional costs came in the form of labor wages and hygiene equipment. Early on in the pandemic, we saw companies shift from the ‘customer-first’ mindset to an ‘employee-first’ mindset to try to protect their susceptible workforce, described grocery researcher Anne-Marie Roerink.

This included purchasing materials like masks, plexiglass cashier shields, and hand sanitizer stations. Many retailers and suppliers started providing “hazard pay” on top of an employee’s regular wage. Eventually, workers did get sick (or suspected they could be sick) and were paid to stay home to prevent additional infections. More labor had to be hired.

Kroger, a network of 2,800 stores in 35 states, experienced all of these types of costs in their stores and in their processing plants, said Mike Brown, the company’s dairy supply chain director. He painted the picture like this: The business saved a bit of money with travel reduced. “But we’re spending more on sanitizer than that travel budget.”

These costs are, of course, spread across all items in the store, not just one department. Unprecedented shortages like we saw earlier this year also play into elevated prices; for example, meat prices are inflated 15% to 18% according to Roerink. “Yes, shoppers are seeing higher prices not just in dairy, but really everywhere,” she stated. “Across the store, it's about 6%, and then there’s departments like meat that are very extreme. Dairy is actually fairly modest compared to some of the others.”

Less fluctuation at the store
In normal conditions, retailers strive to keep prices relatively consistent for the consumer by buffering the volatility that farmers and processors often have to deal with. Instead of swinging the price of a gallon of milk up or down dependent on the price they paid for it, Brown described that Kroger manages their margins mostly with promotions. When cheese prices are down, they will run more, and when prices rebound, there will be fewer sales.

This helps explain why, even when milk prices are low, the cost at the store does not slide with it. Consistency in price means a consumer is more likely to stick to a buying habit. “The only thing harder than explaining milk pricing to someone in the industry is explaining to someone who’s not,” observed Brown.

An ongoing series of events
DairyLivestream will air twice each month for the remainder of this year. The next broadcast will be on Wednesday, July 22 at 11 a.m. CST. Each episode is designed for panelists to answer over 30 minutes of audience questions. If you haven’t joined a DairyLivestream broadcast yet, register here. Registering once registers you for all future events.

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(c) Hoard's Dairyman Intel 2020
July 16, 2020
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