Tuesday, October 02, 2007

Milk and elasticity

When a company is receiving a record high price for their product, they're usually doing pretty well. Apparently that's not so for the dairy industry.

DALLAS (AP) — Dean Foods Co., the nation's largest dairy producer, scaled back its profit forecast for the year, saying record-high milk prices are hurting sales and causing consumers to switch from name brands to cheaper private-labels products.

The company also said Tuesday it plans to cut 600 to 700 jobs, more than 2 percent of its work force.

Dean lowered its profit expectations for the third quarter and all of 2007. The company expects to take a restructuring charge in the quarter for the job cuts, but it didn't provide a dollar figure...

With high product prices, why do they have a problem? Some hints:

Jack Callahan, Dean's chief financial officer, said dairy sales have softened in the face of higher prices — although he didn't give figures. He also said consumers were shifting from brand names to store private-label products. Analysts said the branded items are more profitable for Dean.

Exports are also mentioned.

Exports rose to 11.2 percent of the nation's milk production in the first six months of this year, up from 7.5 percent in 2004, according to the U.S. Dairy Export Council.

Roger Hoskin, an economist with the U.S. Department of Agriculture, said rising production should bring prices down next year — but not dramatically.

"If people expect that prices are going back to where they were a couple years ago, that ain't gonna happen," he said. "The demand is there, and a lot of it foreign."

But normally, an industry with increasing exports becomes more profitable, not less.

Perhaps this is realted to the price elasticity of demand for milk. If the demand for milk is elastic, an increase in price reduces the quantity demanded by a greater percentage than percentage increase in price. Hence, revenue falls. Could this be the issue? From Dean's press release:

sales volumes in the Dairy Group have softened as consumers react to the record high prices. We are also seeing a pronounced shift from branded products to private label in some of our regional brands.

I don't know much about the dairy business, but this is interesting.



Blogger Josh said...

The useful information that I get from the article is that money spent on "premium" brands of milk is wasted. The milk is the same, but the premium milk is more profitable for the dairy.

I don't think that was the intended message.

October 9, 2007 at 2:25:00 PM MST  

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