Wednesday 18 July 2012

Why milk is so cheap and what if you doubled its price?

What if you doubled the price of milk?

Waitrose essential semi-skimmed milk: 118p for 2 litres.

If you doubled the price of this milk, for an average household consuming, say, 3 litres per week, that would mean an additional cost of 177p for the price of their milk.

Is this an unreasonable price for a staple product? We would say not.

Milk is fundamentally underpriced, as supermarkets have adopted a pricing strategy of dropping the price on core lines of staple products so as to appear incredibly good value to customers, whilst maintaining big margins on other product lines. Incredible indeed, and unsustainable.

Over the last 150 years, food prices have steadily fallen. 150 years ago, food was 13 times more expensive than it is now! 50 years ago, we were spending 1/3 of our income on food, last year it was just 7.7%. Against this backdrop of steadily falling prices, it is no surprise that the customer expects and wants to spend less on food and more on other products, and that we have (and retailers encourage) a "why pay more?" mentality.

And our priorities have shifted. What are the most successful new consumer companies of the last 10 years? Apple, Amazon, Starbucks, Sky to name but four. People think nothing of upgrading to the new iphone, or a getting that "must have ipad", or treating themselves to a £2.95 coffee each morning, but generally will adopt a "why pay more?" attitude when it comes to staple products.

It is perverse thinking, and though we at Farm Direct are believers in capitalism and the free market, we feel that this is a clear example both of market failure, of bullying oligopolistic pricing policies within the food industry and a misguided and overexpectant consumer. Dairy farms in desperate straits is the outcome.

Surely it is simply a case that the pendulum has just swung too far?The price of milk is plainly not going to double. As we see farmers trying to renegotiate the price for their product, it is worth bearing in mind that virtually all such negotations use the existing price as the marker from which the tug-of-war then starts.

We don't think this is right, as we believe milk is fundamentally undervalued and has been for a long time.

1 comment:

  1. You are making a very good point; we have taken the price reduction for granted - although it would be interesting to see how much the production costs have gone down by as well.
    I would also add that the people that would be the most impacted by the price increase clearly aren't the ones that buy 2.99 coffees every morning or update their iphones as soon as new model comes out.
    Your point is still valid - the prices of most produce and staple product is too low and pushing farmers out of the market.... threatening the future of the industry