Why our milk costs so much.

This story is by our favorite writer on the USDA - Andrew Martin at the Washington Bureau of the Chicago Tribune, June 26, 2006

Here's something to sour your next trip to the grocery store.

Chicago-area consumers are charged more for milk than consumers in all but a handful of urban markets, according to statistics maintained by the U.S. Department of Agriculture.

Chicago was the most expensive market in the nation for whole milk in 2005, averaging $3.96 a gallon. In comparison, a gallon of milk in Carbondale, Ill., just five hours away, was among the cheapest in the nation last year, averaging $2.68 for whole milk and $2.55 for 2 percent.

It might seem that Chicago would have a competitive advantage over other cities when it comes to milk because the second-biggest repository of milk in the nation--Wisconsin--is just up the road.

But not much makes sense when it comes to milk pricing in the United States. The marketplace has been warped by consolidation and outdated federal regulations that even the Justice Department describes as "archaic and inefficient." There are fewer milk bottlers and fewer grocery store chains to sell the milk.

Who profits?

Based on industry and USDA statistics, it isn't the dairy farmers.

Dairies do not sell raw milk directly on the market; they are represented by cooperatives that collect the milk and find a place to sell it, balancing the ebbs and flows between production and demand. Once they sell it, they send payment to the farmers.

Last year, dairy farmers in Wisconsin received about $1.34 a gallon for raw milk, which translates to about 34 percent of what Chicago consumers spent on whole milk. Nationwide, dairy farmers received an average of about 39 percent of what consumers paid for whole milk.

The cooperatives that serve Wisconsin farmers receive about 22 cents for each gallon of milk sold in Chicago. That is among the most expensive in the country, according to USDA statistics. In Denver, for example, cooperatives make about 7 cents per gallon.

Once the milk is sold to a processing plant, it typically costs 70 cents to 80 cents per gallon for processing, packaging, distribution to stores and profit, said Corey Durling, a partner with the consulting firm Dairy Technomics in New Jersey. Those "non-milk costs" incurred by milk processors are not available for public review, and Durling said it was possible, though unlikely, that bottlers in the Chicago area charge higher prices.

Adding all those costs, using the higher number for "non-milk costs," the result is that Chicago supermarkets and convenience stores paid about $2.36 for a gallon of whole milk in 2005.

That means grocery stores--at least the ones charging $3.96 --made an average gross profit of $1.60 off every gallon of whole milk sold in 2005, or 40 percent of total revenue.

Chicago-area retailers appear to be making far more than the national average on milk. According to Durling, retailers usually make about 30 percent of total revenue on milk.