---------------------------
Economic and Marketing Report
on
eRE AM
Prepared for
THE MILK INDUSTRY FOUNDATION
by
The Economic and Marketing
Committee on Cream
July 1970
FOR E W 0 R D
This is one of three reports prepared for the Milk
Industry Foundation by its Economic and Marketing Committee
on Cream, Yogurt, and Cottage Cheese.
The Foundation and its members are deeply grateful
to the Ex-Cell-O Corporation and the suppl iers of PurePak cartons for providing the necessary funds to conduct
these studies. Their contribution to the industry through
this channel is greatly appreciated.
The committee has carefully developed many facts regarding the marketing of yogurt, cream and cottage cheese.
It has traced the competitive relationships of these products
in the marketplace, identified substitutes and other products
with which they compete, and calculated the potential effect
on the market sales and dairy farme~ lncome of various classifications under Federal milk marketing orders.
The marketing information contained in each of the reports will be of great benefit to each company producing
the products. Likewise, it will be of great benefit to
regulatory officials in developing appropriate regulatory
plans.
Committee members are prominent persons with extensive
and varied backgrounds. Economists, marketing special ists,
industry representatives,and food retailers have given their
knowledge, talents,and broad experience to this study and
its conclusions.
Officers and Board of Directors
Milk Industry Foundation
Suite 1105, Barr Building
910 17th Street, N. W.
Washington, D. C. 20006
Gentlemen:
We are pleased to transmit this report containing a considerable
amount of marketing information on light and heavy cream, and recommendations for the price classification of cottage cheese under Federal
milk marketing orders.
We believe we have developed a number of facts which were heretofore not available to the industry and regulatory officials. We have
collectively analyzed these facts, reached conclusions, and offered
recommendations. We hope the information presented in the report wi 11
be useful to all concerned.
Respectfully submitted on behalf of
the MIF Economic and Marketing Committee
on Cream, Yogurt, and Cottage Cheese
Dr. Ronald D. Knutson, Co-chairman, Cream
Associate Professor, Agricultural Economics,
Purdue University
Committee Members:
Dr. Richard Aplin
Co-chairman, Cottage Cheese Report
Cornell University
Ithaca, N. Y.
Dr. Frank Groves
University of Wisconsin
Madison, Wis.
Mr. Frank King
Dr. Robert E. Jacobson
Co-chairman, Yogurt Report
Ohio State University
Columbus, Ohio
Dr. Richard C. Haid~cher
Purdue University
Lafayette, Ind.
Dr. Don R. Nicholson
Borden, Inc.
New York, N. Y.
Dr. William Alexander
Louisiana State University
Baton Rouge, La.
Mr. Dean Hicks
The Kroger Company
Cincinnati, Ohio
Dr. William G. Tomek
Cornell University
Ithaca, N. Y.
C. M. Fistere
Fistere, Habberton & Durland
Washingtou s D. C.
(Counsel for MIF)
Mr. Joseph Kagan
Dr. Francis E. Walker
Ohio State University
Columbus, Ohio
Dannon Milk Products
Long Island City, N. Y.
Seal test Foods
New York. N. Y.
TABLE OF CONTENTS
FINDINGS . .
CONCLUSIONS
ii
THE PROBLEM
OBJECTIVES
PROCEDURES
2
DESCRIPTION OF THE CREAM MARKET
li ght and Heavy Cream Markets
Consumption Patterns for Dairy and Nondairy Creams
Pricing Patterns for Dairy and Nondairy Creams. .
Competitive Aspects and Impl ications of Sterilized
Da i ry Cre ams . . . . . . . . . . . . . . . . .
2
2
6
8
THE FEDERAL ORDER PROGRAM AND CLASSIFIED PRICING SYSTEM
Price Discrimination. . . . . . . . . . .
Orderly Marketing. . . . . . . . . . . .
Analysis of the Demand Elasticity for Cream
Implications for Classification . . . . . .
Effect of Classification Pricing Pol icies on the
Market for Cream. . . . . . . . . . . .
Effect of Classification Pricing Pol icies on the
Da i ry Fa rme r . . . .
11
11
12
13
15
8
15
18
LI ST OF TABLES
Tab les in
Report
2
3
4
5
6
7
8
9
Per Capita Consumption of Cream, including Sour
Cream and Eggnog,
1940-1969 . . . . . . . . .
3
Yearly per Capita Consumption of Light and Heavy
Cream for all State and Federal Marketing Order
Areas, and for Three "Fluid Milk and Cream Report"
Regional Order Areas, 1960, 1964, and 1968 . . .
5
Profi Ie Tab les by Region, Income, Education, and
Household Size for Use rs of Dai ry and Non-Dairy
Cream .
.
. .
. .
7
Pe rcent of Total Servings of Dai ry and Nondairy
Creams According to Use, Ju ly 1967 - June 1968.
9
Cost of Heavy and Light Cream per Cwt. in Various
Price Classifications with a Fixed Butterfat
Differential of 8.0 Cents per Point . .
17
Effect of Classification on the Cost of One Pint
Light and One-half Pint Heavy Cream, Processor
Retailer Margins, Retai 1 Price, and the Percentage
Change in Price Assuming a .Fixed 8 Cent Butterfat
Differential........
17
Expected Consumption Response for Various Price
Levels with a Price Elasticity of -0.8 for Light
Cream and -1.0 for Heavy Cream for Markets
Currently Pricing Cream at the Manufacturing
Level of $4.65 per Cwt. of Milk . . . . .
19
Expected Consumption Response for Various Price
Levels with a Price Elasticity of -0.8 for Light
Cream and -1.0 for Heavy Cream for Markets
Currently Pricing Cream at the $6.50 Class
Le ve 1 . . . . . . . . . . . . . . . . . . .
19
Change in Revenue from Cream Resulting from a
Change in the Classification of Light and
He a vy Cre am . . . . . . . . . . . . . . . .
21
FINDINGS AND CONCLUSIONS
of the Milk Industry Foundation
Economic and Marketing Committee on Cream
FINDINGS
1.
Both 1 ight and heavy cream are facing increasing competition from nondairy
substitute products.
2.
From 1950 to 1969, total cream consumption in the United States decl ined
from 11.1 to 5.9 pounds per capita. Both 1 ight and heavy cream experienced
a sharp decl ine in per capita consumption during this period.
3.
Much of this decline in consumption is a result of the introduction of
lower-priced nondairy substitute products.
4.
Consumption profiles for dairy and nondairy cream consumers are nearly
identical, indicating a high degree of substitutabil ity between the products.
5.
Pricing patterns for dairy and nondairy products result in a preference
being given to the nondairy creams in supermarket marketing strategies.
6.
Sterilized aseptically packaged dairy creams offer the possibil ity of both
convenience and competitive pricing with nondairy products if they are
properly classified.
7.
Classification of cream under the federal order pricing system is not
uniform.
8.
While lower-priced cream substitutes have entered the market, milk used in
cream continues to be priced at the Class I level in many United States
markets.
9.
The orderly marketing and producer return enhancement objectives of the
federal order pricing program are not necessarily inconsistent.
10.
The elasticity of demand for 1 ight cream was estimated to be -.8 (a 10%
change in price would be accompanied by an 8% opposite change in consumption). This is comparable to the elasticity of demand for manufactured
dairy products such as butter.
11.
The elasticity of demand for heavy cream was estimated to be -1.0 (a 10%
change in price would be accompanied by a 10% opposite change in consumption). This is somewhat higher than the elasticity of demand for
most manufactured dairy products.
12.
Based on these elasticity estimates, a change in classification of 1 ight
and heavy cream from Class 1 to the manufacturing level should increase
1 ight cream consumption by 16 mill ion pounds and heavy cream consumption
by 2 mill ion pounds. The net effect might be to increase total revenue
by nea r 1y $ 10m ill ion.
- i -
CONCLUSIONS
It is well recognized and establ ished in this report that under present
price structures, where most cream is priced at the Class I level, cream is
experiencing considerable difficulty competing with nondairy substitutes. The
decl ine in cream consumption from 1960 to 1967, for example, depressed the
price of manufacturing milk by nearly 7 cents per hundredweight, costing farmers nearly $82 mill ion. At present price levels, cream is clearly having
difficulty competing with nondairy products. Dairy creams could be given an
opportunity to compete with nondairy products by classifying milk used in cream
at the manufacturing level with other manufacturing products with comparable
elasticities.
Such a pricing pol icy is consistent with the orderly marketing objective
of the federal order pricing system. Under a uniform pricing system where all
cream was priced at the Class I I level, all handlers would be in a position to
compete on an equal raw product cost basis for cream sales. Cream would also
be priced on a basis consistent with the concept that products which are least
responsive to price changes be priced at the Class 1 level.
- ii -
REPORT TO THE MILK INDUSTRY FOUNDATION
ON THE DEMAND FOR AND CLASSIFICATION OF CREAM
Ronald D. Knutson and Richard C. Haidacher
The Problem
Since the 1950's more direct substitutes have been introduced for 1 ight and
heavy cream than for any other dairy product except butter. The 1 ist of substitute products includes names such as Pream, Coffeemate, Cremora, Coffee
Rich, Lucky Whip, Dream Whip, and Cool Whip. The more perishable and higher
priced dairy creams have experienced considerable difficulty competing with
these new nondairy products. From 1950 to 1969 total cream consumption in the
United States decl ined from 11.1 to 5.9 pounds per capita.
While many lower-priced substitute products have entered the market in
competition with cream, the pricing system for milk used in cream has remained
the same. That is, except for a few markets, mostly in the Eastern and Northeastern United States, milk used for cream has been priced with fluid milk in
the higher-price Class I category. Despite increased competition from substitutes, the price of cream during the 1960's continued to rise with increases
in the Class I price and premiums, where they exist.
The dairy industry has experienced considerable difficulty competing with
the new nondairy substitutes for cream. The nondairy products are not only
less expensive but also are frequently more convenient in the se nse that they
nave longer shelf 1 ife and require less preparation time. Dairy processors
have attempted to compete with nondairy products in terms of convenience by
packaging wnipping cream in aerosol cans. More recently steril ized and aseptically packaged cream products have been developed to compete with the lower
cost and more convenient nondairy products. Those products offer new possibil ittes for regaining part of the cream market. Yet the pricing of cream
used tn these products remains a critical question. If they are priced at the
Class I level, the light and heavy creams will likely continue to experience
difficulty competing with the nondairy substitutes. Pricing at the manufacturing level combined with the increased convenience of these products could
perceptibly enhance their competitive position in food markets. A rational
pricing pol icy is particularly crucial in products which are high in butterfat
content--a market which has already suffered from the competition of margarine
and other nondairy products.
Objectives
This study is designed to provide insight into the trends in consumption
and demand characteristics for cream and its substitutes. This knowledge can
aid in the development of a rational pricing program for milk and milk products. More specific objectives for the study are:
1.
To describe and analyze the trends in consumption
of cream and its substitutes.
2.
To analyze the market responsiveness of cream purchases to changes in price.
- 1 -
3.
To analyze the impl ications of trends in consumption
and market responsiveness for price regulation and classification.
Procedures
The Milk Industry Foundation asked the Economic and Marketing Committee
on Cream to develop and analyze the necessary information to accomplish the
study objectives and to recommend appropriate action for the classification
of cream within the federal order pricing system. The data used in the study
were gathered from both primary and secondary sources. More specific sources
were: (1) surveys on household food consumption, (2) sales volumes and prices
of cream and cream substitutes from food chains in the Northeast, Midwest and
Southwest, (3) market studies conducted by private firms, (4) data collected
from various companies in the industry, and (5) data and information published
by the United States Department of Agriculture.
DESCRIPTION OF THE CREAM MARKET
The cream market is characterized by decl ining consumption. Per capita
cream consumption hit its peak at about 13 pounds in the latter half of the
19401s.
In 1950 the per capita consumption of cream was 11.1 pounds. Since
1951 there has been a relatively persistent and continuous decline until in
1969 consumption reached 5.9 pounds per capita (Table 1). The downward trend
in cream consumption is undoubtedly due to a number of factors. However, the
introduction of lower priced substitutes, the comparative convenience of substitutes, and the diet consciousness of the consumer probably rank among the
most significant factors.
It is interesting to note that the consumption of
cream has almost continuously decl ined since Pream, the first dairy substitute
for coffee cream, was introduced in 1951. It was also during the 1950 l s that
whipping cream substitutes such as Dream Whip were introduced. The decl ine in
cream consumption has been even more substantial and persistent since 1961 when
Coffee-mate, the first nondairy creamer, was introduced .
Light and Heavy Cream Markets
Dairy cream can logically be divided into two groups--l ight cream and
heavy cream--according to the use made of the product by the ultimate consumer.
Light Cream -- In this study 1 ight cream was defined as cream with less
than 20 percent butterfat. This definition includes both the traditional 1 ight
or coffee creamers which normally are about 18 percent butterfat as well as
the half-and-half milk and cream mixtures which are normally about 12 percent
butterfat. The trend in sales is clearly toward the lower butterfat half-andhalf cream.
In 1968 nearly 90 percent/of the. 1 ig~t cream sales, as defined in
thi s study, were half-and-half cream.- That IS, In 66 state and federal order
markets in 1968, per capita consumption of half-and-half cream averaged 3.14
pounds while per capita consumption of 18 percent butterfat cream was .38 pounds .
Total 1 ight cream consumption in the 66 markets, therefore, averaged 3.52 pounds
in 1968. (Table 2) On a pound-for-pound basis 1 ight cream consumption accounted
for 87 percent of all fresh cream consumed in 77 state and federal order markets
during 1968. 2/
1/ USDA, Fluid Milk and Cream Report, May 1969.
2/ fbtd.
- 2 -
Table I.
Per capita consumption of cream, including sour
cream and eggnog, 1940-1969.
Yearly Per Capita
Consumption
(18 percent butterfat)
Year
(pounds)
1940
1945
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
Source:
10.6
12.8
11. 1
11. 1
10.5
10.3
9.8
9.6
9.8
9.6
9.3
9. I
9. 1
8.8
8.6
8.2
7.8
7.6
7.2
6.8
6.4
5.9
USDA, Dairy Situation, D.C. 328, November
1969 and Dairy Statistics through 1960, Statistical Bulletin 303, February 1962.
- 3 -
Since the early 1950 ' s there has been a general downward trend in 1 ight
cream consumption.
In 1960 the per capita consumption of 1 ight cream was 5.54
pounds. By 1968 per capita consumption decl ined by 36 percent to 3.52 pounds.
(Table 2) The data for the New England, East North Central, and West South
Central order regions indicate that the decl ine in 1 ight cream consumption has
occurred across the United States. In 1965 the USDA survey of food consumption
in households foujd that 10.3 percent of the households used I ight cream in a
particular week.l
As indicated previously, 1 ight cream consumption has been particularly
hard hit by the introduction of substitutes. The first inroad by substitutes
was made into the coffee cream market in 1951 by the manufactured dairy creamer,
Pream. Pream was about the only substitute creamer sold in grocery stores until 1961 when Coffee-mate, the first nondairy creamer, was introduced. Pream
followed with a nondairy creamer in 1962, and other branded products such as
Cremora and chain private labels were subsequently introduced.
In 1968 most
stores handled at least three powdered coffee cream substitutes.
Liquid 1 ight cream substitutes came on the market in the mid-1960 ' s. These
products include brand names such as Rich's Coffee Rich or Milnot. These products have been followed by the introduction of several dairy company name brand
products and by the private labels of supermarket chains. The 1 iquid creamers
such as Rich's Coffee Rich not only substitute for coffee cream but also substitute in cereal, baking, and dessert uses for 1 ight cream. The data in Table 2
appear to indicate that the I iquid cream substitutes introduced during the period,
1964 to 1968, had about the same effect on the demand for light cream as the
powdered substitutes introduced during the period, 1960 to 1964. Chain store
sales data indicated that the 1 iquid nondairy creamers are making important inroads into the powdered creamer market. This would tend to indicate that consumers prefer the 1 iquid creamer over the powdered creamer.
If this is the
case, competitive pricing of the dairy creamers and improvement in shelf 1 ife
through steril ization and aseptic packaging could probably substantially improve
the competitive position of I ight cream.
Heavy Cream -- As used in this study heavy cream includes all creams with
over 20 percent butterfat. The heavy cream products generally fall into two
categories. One category is generally referred to as all-purpose cream and
contains about 25 percent butterfat. This product can be used in cooking or
baking, on desserts in I iquid form, orit can be whipped . The second category
is generally referred to as whipping cream.
It normally contains about 35 percent butterfat and has particularly good whipping qualities.
In 1968 heavy cream accounted for only 13 percent of the fresh cream market
on a pound ~~s is.
I n terms of butterfat, it accounted for about 20 percent of
the ma rket.In 1965 the USDA survey of food consumption in households f04nd that 7.7
percent of the households used heavy cream in a particular week.2!
3/
USDA, Food Consumption of Households in the United States,
Spring 1965, report No.1, p. 13.
4/
USDA, Fluid Milk and Cream Report, May 1969.
5/
USDA, Food Consumption, p. 13.
- 4 -
Table 2.
Yearly per capita consumption of 1 ight and heavy
cream for all state and federal marketing order
areas and for three Fluid Milk and Cream Report
regional order areas, 1960,1964, and 1968.
Fluid Milk and
Cream Report
Order Area
Yearlt Per Capita ConsumEtion
Light Cream.!!
Heavy Cream
-----------pounds-----------All 77 Sta te and
Federal Order
Markets
1960
1964
1968
5.54
4.72
3.52
.94
.70
.52
6.99
4.49
4.28
3.07
1. 29
1. 10
7.63
5.78
4.43
.76
.63
.36
3.88
2.81
2.05
.68
.60
.54
New England and
Middle Atlantic
1960
1964
1968
East North Central
1960
1964
1968
West South Cent ra 1
1960
1964
1968
Source:
USDA, Fluid Milk and Cream Report, 1961-69.
1/ Includes pounds consumed of both milk and cream mixtures (half-andhalf) and 1 ight cream or coffee cream as reported in the Fluid Milk
and Cream Report.
- 5 -
Heavy cream has undergone the same downward trend in consumption as 1 ight
cream.
In 1960 the ~verage per capita heavy cream consumption for state and
federal order markets was .94 pounds. (Table 2) By 1968 per capita consumption
dec1 ined nearly 50 percent to .52 pounds. Regional data indicate that this
decl ine in consumption has been quite general with as much as a 64 percent
decl ine in consumption in the traditionally high consumption New England and
Middle Atlantic regions.
Substitutes for heavy cream are also widespread. The 1 ist of substitutes
includes the aerosol nondairy toppings such as Lucky Whip, powdered toppings
such as Dream Whip, I iquid toppings such as Rich's Whip Topping, and whipped
frozen toppings such as Cool Whip. All of these toppings have tended to decrease the market for whipping cream. Both convenience and the fact that they
are priced at levels below or very competitive with heavy cream have made them
successful competitors with heavy cream. The convenience aspect appears to be
particularly important in the case of the frozen whipped toppings such as Cool
Whip. A perceptible decline in heavy cream consumption can be noted in the
chain store sales since Cool Whip was introduced in June 1967.
.
Consumption Patterns for Dairy and Nondairy Creams -- Market research data
indicate that from July 1967 to June 1968 nearly 40 percent of 4,000 households
used da~ry creams (includes sour cream) while just over 20 percent used nondairy
creams.~ The USDA found tha /in 1965 the average consumption of nondairy cream
substitutes was 1.56 pounds.-
7
Market research data for 1967-68 indicate that the profile of consumers
using dairy and nondairy cream is nearly identical. That is, there are few
differences on a regional, income, education, occupation, size of household, or
race basis in the proportion of people using dairy and nondairy products. Table
3 illustrates this profile similarity for users of dairy and nondairy creamers
for different regions, levels of income, education, and family size groupings .
The data in Table 3 need to be interpreted very carefully.
In the case of the
Census Region category, the data indicate that of those households using dairy
creamers 25 percent were located in the Northeast, 33 percent in the North Central, 20 percent in the South, and 22 percent in the West. All of the groupings for dairy and nondairy creams can be similarly interpreted. This similarity
of profiles provides an indication that dairy and nondairy creamers are substitutable for a substantial proportion of the households.
The substitutabil ity of dairy and nondairy creamers is also indicated by
the fact that they are used almost equally on different days of the week. That
is, approximatel~ 14 percent of the dairy and nondairy creamers were used each
day of the week.~ Ninety percent of the dairy creamers and 84 percent of the
nondairy creamers were used as part of a meal. The remaining 10 percent of the
dairy creamers and . 16 percent of the nondairy creamers were used as part of a
snack. There was a tendency for the nondairy creamers to be used more frequently
as an additive to prepared foods than as an ingredient in preparing foods.(Table
4)
6/ National Household Menu Census of the Marketing Research Corporation of Amer i ca;
used through permission granted the Milk Industry Foundation.
7/ USDA, Food Consumption, p. 13.
8/ National Household Menu Census of the Marketinq Research Corporation of America;
used through permission granted the Mi lk Industry Foundation.
- 6 -
Table 3.
Profile tables by region, income, education,
and household size for households using dairy
and nondairy cream.
Percent of households using
Household
Cha r act e r i s tic
Dairy Cream
Nonda i ry Cream
-----------per cent----------Census Region
Northeast
North Central
South
West
Household Income($)
Under 4,000
4,000- 6,999
7,000- 9,999
10,000-14,999
15,000 and over
Education - Head of
Household
Less than 9 years
9-12 yea rs
13 years and over
Household Size
1 person
2 persons
3-4 persons
5 or more persons
Source:
25
33
20
22
100
26
35
24
15
100
20
23
24
22
11
100
21
25
25
20
9
100
25
46
29
100
25
49
26
100
12
35
32
21
100
14
31
32
23
100
National Household Menu Census of the Marketing Research
Corporation of America; used through permission granted the
Milk Industry Foundation.
- 7 -
Pricing Patterns for Dairy and Nondairy Creams -- The fact that cream is
used as an additive or complement to other products such as coffee or strawberries has some important implications for merchandising qnd pricing of dairy
and nondairy products at the retai I level. Such complementary produc~s provide
the retailer with an opportunity for a related item or tie-in sale. For example, a retailer can run a price special on strawberries or coffee and substantial ly affect the sales of either dairy or nondairy creams. The retailer
can promote the sale of a particular dairy or nondairy cream product by displaying them together, advertising them together, or specialing them at the
same time.
If cream is used as a tie-in product with coffee or strawberries,
the "real price" of cream may be reduced by running a special on strawberries.
Simi larly the "real price" of strawberries or coffee may be reduced by running
a special on cream or its nondairy substitute.
It was found in the study that retailers do not generally manipulate or
special the price of cream nor do they use cream as a tie-in product with
specials on complements such as coffee or strawberries. While differences do
exist among markets, five factors appear to contribute to the lack of cream
specials: (I) Margins on cream at the retail level are not as large as margins
on the nondairy products. Chain data indicate that retailer margins on cream
are generally in the range of from 10 to 20 percent while margins on the nondairy products are normally in the range of from 20 to 30 percent. (2) Dairies
do not generally give wholesale or promotional price specials on cream. This
is in direct contrast to the "cents off " discounts and promotional discounts
frequently given by nondairy cream processors. These nondairy promotions at
the wholesale level are directly tied to promotions at the retail level. (3)
Dairy creams are not generally used as tie-ins with complementary products.
Low margins and the lack of promotions considered above do not give retailers
an incentive to use cream as a tie-in. (4) The perishabil ity of cream makes
it a more difficult item to special. With dairy cream, stocks or out-of-stocks
may become a difficult problem for the chain. In addition, perishabil ity means
that the consumer cannot make mUltiple purchases of dairy cream as she can with
nondairy products. (5) In some states cream prices are establ ished by state law.
This makes specials on cream impossible.
The hesitancy and/or inabil ity to run cream as a special either in competition with or as an alternative to the nondairy product may be tending to
further accelerate the trend toward lower cream consumption. That is, nondairy
creams are receiving the consumers' attention by special supermarket price,
advertising, and merchandising treatment. Dairy creams are not 5eing similarly
called to the consumers' attention. In fact, some processors indicate that
chains consider dairy creams unprofitable items which are a necessary nuisance
on the grocery shelf.
It would appear that improved storability, wider margins, and lower cream
prices could be used to combat this competitive problem.
Competitive Aspects and Impl ications of Steril ized Dairy Creams -- Steril ization of cream in conjunction with aseptic packaging has been an increasingly
important development in the cream market in recent years. Thus far in the discussion, it has been observed that the perishabil ity of fresh cream creates
convenience and storabil ity problems for both the consumer and the supermarket.
Tests and actual distri&ution indicate that, with current processing and pack~
aging techniques, steril ized and aseptically packaged cream products can 5e
- 8 -
Table 4.
Percent of total servings of dairy and nondairy
creams according to use, July 1967-June 1968.
Use
Dairy Creams
Nondairy Creams
------------percent-----------Base Dish..!!
Additive?!
Componentl!
Ingredient!!!
Source:
.4
87.5
11.9
1.3
93.4
1.4
3.9
100.00
100.00
.2
National Household Menu Census of the Marketing
Research Corporation of America; used through permission granted the Milk Industry Foundation.
1/ A Base Dish is the end product that is served and eaten,
per se.
2/ An Additive item is added to a Base Dish after the base
dish has been prepared and can usually be added or not
at the discretion of the eater.
3/ A Component is a subsidiary part of a Base Dish. It is
usually made separately from, and then combined with the
base dish such as Homemade Frosting on a cake.
4/ Ingredients are the food elements or products from which
Base Dishes, Additives and Components are made.
- 9 -
produced which have a shelf 1 ife of up to 6 weeks with no deterioration in product qual ity.
The production of steril ized cream requires ultra high temperature equipment for steril ization. Special equipment is also required for aseptic packaging.
Several types and sizes of containers can be used for packaging. Common packages
include laminated plastic, paperboard, foil-lined cartons, cans with lacquer coating, and various plastic containers.
The number of plants having equipment necessary to steri 1 ize and aseptically
package cream is not known. Through contact with industry sources it was found
that at least seven companies were involved in steril ized aseptically-packaged
cream production at the time of the study. This cream was generally processed
in highly special ized plants manufacturing only steril ized products. These plants
were distributing their products over a wide area. A Cal ifornia plant, for example, distributes steril ized aseptically-packaged cream as far away as the east
coast.
While this segment of the industry is so young that general ization is difficult, there appears to be a definite tendency for plants to be located in
markets where cream can be purchased for sterilization and aseptic packaging
at the manufacturing price level. In addition, since transportation is crucial
to achieving volume sales, plants tend to be located in areas where transport
rates to other parts of the country are relatively lower. Transport rates appear
to vary depending on individual processor arrangements with the transport agency.
In some cases, cream is sold f.o.b. plant, and the buyer pays the transport
charge.
There is 1 ittle consistency in federal order pol icy as far as classification
of steril ized aseptically-packaged cream is concerned. About 38 markets currently exempt steril ized products in hermetically sealed containers from Class
classification. In certain markets they are exempt only if sealed in glass or
metal containers. Both Grade A and Grade B milk are used in the processing of
steril ized aseptically-packaged cream. Grade B processors have a substantial
cost advantage over nearby markets which classify cream at the Class I level.
While cream used in sterilized products is generally classified at the Class I I
level, there are significant differences in the cost of processing and packaging
fresh as opposed to sterilized cream. Special ized equipment, packages, technical
labor for plant, qual ity control, slower 1 ine speed, and shorter production days
all result in higher costs for the steril ized products. Industry sources indicate that processing and packaging costs for the steril ized product are at least
twice as high as for unst~ril ized products. These cost differences would, however, be expected to change with higher plant volumes.
Out-of-store prices on steril ized and fresh cream products are generally
about the same and about 5 to 10 cents per pint more than 1 iquid nondairy creams.
The main advantage in the steril ized cream is, therefore, its longer shelf 1 ife.
Although accurate data are not available, industry sources indicate that
sales of steril ized creams are growing constantly. Selective industry studies
indicate that these increased sales are coming from both fresh cream and from
the nondairy creamers. Thus, available evidence indicates that markets previously lost to nondairy cream might be recaptured, in part, by the sterilized
aseptically-packaged products. Industry sources emphasize, however, that the
- 10 -
price relationship between dairy and nondairy creams is critical. In markets
where steril ized cream is priced at the Class I level, considerably more difficulty has been encountered competing with the nondairy products. Increased
convenience alone does not appear to be enough to attract the consumer away
from the nondairy product. But prel iminary data and market experience indicate
that convenience combined with competitive pricing can make inroads into nondairy consumption in addition to discouraging further decl ines in dairy cream
consumption.
THE FEDERAL ORDER PROGRAM AND
CLASSIFIED PRICING SYSTEM
Federal and state milk marketing orders are the main systems for administratively establishing minimum prices in today's fluid milk markets. Many
different objectives have been stated for the federal milk order program. Two
primary objectives may be summarized as follows:~
I.
To assure consumers an adequate and dependable supply
of high qual ity milk produced in an efficient manner.
2.
To promote orderly marketing conditions for dairy
products.
A central objective of the federal order program is the assurance of an
adequate and dependable ' supply of milk which is efficiently produced. This
objective is concerned primarily with the general level of milk prices. That is,
the price to producers must be high enough to bring forth an adequate but not
excess supply of milk. If production decreases occur due to rising production
costs or improved income opportunities in other areas of agriculture and in other
occupations as has been true in recent years, the whole level of milk prices
needs to be raised to insure adequate milk production.
Price Discrimination
Classified pricing or the pricing of milk according to the products which
processors make from milk is consistent with the objective of maintaining a
pricing structure which will assure an adequate and dependable supply of milk.
Within the classified pricing system, the economic health of the dairy industry
and, more specifically, the long and short run returns to the dairy farmer can
be improved by pursuing a pricing policy which increases the revenue obtai~ed
from a given quantity of milk and, at the same time, minimizes the depressing
effect of higher prices on milk consumption. Revenue can be inc r eased by em-
9/ Order objectives are a summary of those stated in the Report, to, the Secretary
of Agriculture by the Federal Milk Order Study Committee, USDA, Washington,
D.C., December 1962, pp. 12-13. As a part of these objectives more general
objectives relating to the equal ization of market power between buyers and
sellers, coordination of price structures, equitable treatment of parties,
freedom of trade, and market information were also mentioned. Much of this
discussion draws on the practical and theoretical discussion of order pricing contained in the Re~ort of the Dairy Marketing Advisory Committee,
Associated Dairymen, 19 5. This discussion is not meant to be an evaluation
of either the objectives or their interpretation.
- 11 -
ploying a classification system which recognlzes the .responstveness of consumers
to changes in the price of different milk products. Industry revenue can be
increased if the classification system recognizes that different milk products
have different demand responses associated with them. Thus, recognition of differences in the res pons i veness of consumers at the reta ill eve 1 is in the i nterest of producers, processors, and retailers of milk products. The demand for
milk at the retail level ultimately determines how much of a particular milk
product can be sold and thus the total revenue from the sale of milk products.
This, in turn, determines the revenue generated for each segment of the milk
industry.
In economic terms, classified pricing is a form of price discrimination . As a pricing system, it takes advantage of differences in the responsiveness of consumers to changes in product prices. The responsiveness of consumers
to price changes is measured by the elasticity of demand for a product. If the
elasticity of demand is the same for different markets or product uses, the
optimum price in the two markets would be identical according to the theory of
price discrimination.
Price discrimination can be used to enhance the returns of dairy farmers
if demand elasticities vary depending upon the use to which milk is put. Products with few substitutes such as fluid milk have a very inelastic demand of
about -0.3. This means that the price of milk can be raised by 10 percent with
only a 3 percent decline in consumption. The result of raising the price is,
therefore, an increase in producer returns. On the other hand products with
good substitutes, such as butter, have a much more elastic demand. Raising the
price of products with an elastic demand can actually reduce producer returns
because the increase in price will be more than offset by a decrease in the
quantity consumed.
Because of the effect of differences in elasticity of demand on producer
returns, it is crucial that products be priced at a level consistent with their
demand elasticity. Therefore, products with similar demand elasticities should
be placed in the same class. Producer returns could be lowered and the competitive position of particular dai ry . products injured if products with more
elastic demands are placed in a high price milk-use class with products having
a less elastic demand.
Orderly Marketing
Assuming milk prices are
quate supply of milk, orderly
producers and equalization of
equalization mllst exist among
establ ished at a level which will insure an ademarketing impl ies equal ization of returns to
milk costs to processors.l2I For orderly marketing,
both milk products and milk markets.
Equalization of returns to producers means that producers will not have an
incentive to seek out higher price markets. When misal ignments in either Class
or blend prices occur among markets, producers have an incentive to transport
milk among markets to obtain higher returns. Differences in classification
among markets may tend to promote price misal ignment problems and thus provide
an incentive for milk to move. Equal ization of returns to producers encourages
both orderly production and marketing of milk.
Equal ization of milk costs to processors is equally important in achieving
orderly marketing of milk. An important source of disruption of milk markets
IO/ rA Report· of the Dairy Marketing Advisory Committee, Associated Oai rymen, Inc.
p. 41.
- 12 -
occurs when alternative lower price sources of milk suppl ies exist for processors.
Historically, at the processor level, the orderly marketing problem has frequently
occurred because particular products could be made from either Grade A or Grade B
milk sources. In such products, processors without local market access to Grade
B milk suppl ies would be placed at a competitive disadvantage if the Grade A milk
used to make the product was classified at the Class I level. The fact that
cream can be made from Grade B milk suppl ies has been used to justify classifying cream at the manufacturing price level in certain market areas. Similarly,
orderly marketing may require class~fying milk used to produce steril ized aseptical ly-packaged cream at the manufacturing level because in certain markets
this product can be made from Grade B milk suppl ies. If this is the case, fresh
cream would also need to be classified at the manufacturing level in order to
remain competitive with the steril ized product.
During the 1950 l s and 1960 l s improvement in the feasibil ity, ease, and low
cost of intermarket milk movements also gave rise to orderly marketing considerations in a spatial dimension. The spatial dimension exists because processors
are continuously seeking to expand their sales area. Expansion of sales frequently carries processor activities into other federal order markets. When
intermarket milk movements occur, it is imperative that milk for each use be
classified in the same Class in each market. This point is relevant in the case
of fresh cream which is increasingly moving on an intermarket basis with similar
movements in packaged milk. The competitive position of processors can be substantially disrupted if a processor in one market is paying the Class I I price
for cream and a competing processor is paying the Class I price.
The problem of intermarket product movements and a resulting disruption of
competitive relationships becomes even more apparent in the case of steril ized
aseptically-packaged cream which, as indicated previously, is shipped from coast
to coast. All steril ized cream in all markets must be classified at the same
level for orderly marketing and fresh cream must be classified at the same level
to compete with the sterilized product. The fact that Grade B sources can be
used in certain markets for both products suggests that a manufac t uring classification would be necessary to meet the orderly marketing criteria.
Analysis of the Demand Elasticity for Creamll!
An analysis of factors affecting the demand for 1 ight and heavy cream was
undertaken. The purpose of this analysis was to isolate the effect of changes
in the price of 1 ight and heavy cream on the quantity of cream demanded. By
use of econometric techniques of analysis, one can determine the price elasticity
of demand for 1 ight and heavy cream. The price elasticity indicates what percentage change in quantity can be expected from a percentage change in price.
From the elasticity it is possible to estimate how much more (less) pounds of
1 ight or heavy cream will be consumed if the retail price of cream is reduced
(increased).
This study is based on 1 ight and heavy cream sales
price data obtained from primary and secondary sources.
sources include monthly and yearly sales and price data
Western United States chains. T~ese data were obtained
New England, Southern California, and Texas. Secondary
or consumption data and
The primary data
from Northeastern and
for three market areas
data on these markets
11/ See appendix for technical discussion of analysis of demand characteristics
and estimation of elasticity for cream.
- 13 -
in terms of monthly and yearly sales and per capita consumption were obtained
from the Fluid Milk and Cream Report. Accurate price data were not available
from secondary sources. To the best of our knowledge, previous studies of the
elasticity of demand for cream as an item or for the specific 1 ight and heavy
cream products included in this study have not been made.
Two basic types of price-quantity data were available for the study.
First, four-week-period-time-series data were available for the three market
areas from 1965 to 1968. While the quantity information was good for the
four-week period, price information was not readily available which considered
cream specials or specials on complements to cream such as coffee or strawberries.
As a result of these weaknesses in price data, a cross sectional approach
using yearly price and quantity data for the three markets was used. The time
period studied was 1965 to 1968. Estimates were made by use of an equation
I inear in the logarithm of variables. This technique allows direct elasticity
estimation and assumes that the elasticity is a constant over the range of
data.~
Light Cream -- The demand elasticity for 1 ight cream sold through supermarkets was derived using chain store per capita consumption as the dependent
variable and the price, market separation, and market-share variables as the
independent variables. These variables explained 99 percent of the variation
in the per capita consumption of cream.l1/ The elasticity estimate of -0.8 for
1 ight cream means that a 10-percent increase in the price of 1 ight cream will
result in an 8-percent decrease in demand for I ight cream when al7 other variables
are held constant.
.
Heavy Cream -- The demand elasticity for heavy cream sold through supermarkets was estimated to be ~l .0. This estimate was derived by using chain-store
per capita consumption of heavy cream as the dependent variable and price, time,
and market separation variab7es as the independent variables. This relationship
explained 99 percent of the variation in the quantity of heavy cream demanded.
The elasticity estimate of -1.0 means that a 10-percent increase in price will
result in a 10-percent decrease in the demand for heqvy cream when all other
variables are held constant. The higher elasticity estimate for heavy as opposed
to I ight cream is consistent with the observation of industry representatives
that heavy cream is a more price-responsive item in supermarket sales experience.
Inst i tutional Sales -- Although accurate data are not available, it is
estimated that approximately 75 percent of the 1 ight and heavy cream consumed
is sold through supermarkets. The remainder is sold through institutional outlets such as restaurants, schools, and hospitals. While elasticities could not
be directly estimated for these institutional sales, it was considered that the
elasticity of demand in these outlets would tend to be at least as elastic as
the supermarket sales. This conclusion was reached largely because, for the
institutional buyer, cream purchase can represent a significant cost item. As
12/
See addendum (publ ished separate7y) for detailed explanation of estimation
procedure.
13/
See addendum (publ ished separately) for specific estimated equations for
I ight and heavy cream.
- 14 -
a result, the buyer is 1 ikely to watch changes in the relative prices of cream
and cream substitutes more closely than the housewife. A more elastic demand
for cream might therefore be expected.
Impl ications for Classification
Classification of cream under the federal order pricing system is not
uniform. In most markets cream is classified in the higher price Class I use.
The impl icit economic assumption underlying this classification is that the
elasticity of demand for cream is comparable to that of fluid milk. In four
markets, however, cream is classified with manufactured products in the Class I I
use. Here the impl icit economic assumption is that the elasticity of demand
for cream in such diverse markets as Upstate Michigan, Massachusetts-Rhode IslandNew Hampshire, Upper Chesapeake Bay, and Delaware Valley is somehow different
than in the other order markets. In addition, one market -- Oregon~Washington -must assume the elasticity of demand to be intermediate between f luid and manufacturing products by placing it in an intermediate class. To add to the confusion, aerosol-packaged cream is normally priced at the manufacturing level while
aseptically-packaged cream may be priced at the Class lor manufacturing level
depending on the market.
This study has estimated the elasticity of demand for 1 ight cream at the
retail level as -0.8 and the elasticity of demand for heavy cream as -1.0. If
the suggestion is correct that the elasticity of demand for institutional sales
is more elastic than that for store retail sales, the elasticity estimates used
for 1 ight and heavy cream are conservatively low.
The estimated elasticities of -0.8 for 1 ight cream and -1.0 for heavy cream
are comparable to elasticities of demand for manufactured dairy products. Brandow estimated the elasticity of demand for butter at the retail l~vel to be ~0.85,
and the elasticity of demand for cheese was estimated to be -.7.~~ These elasticity estimates are comparable to those obtained in this study for 1 ight and
heavy cream. The comparabil ity of elasticities combined with the theory of price
discrimination suggests that 1 ight and heavy cream be priced at the manufacturing level with other manufacturing products.
Such a classification would also be consistent with concepts of orderly
marketing. The ease of moving cream on an intermarket basis has increased substantially in recent years. This intermarket movement makes uniform price
classification and al ignment among markets increasingly important in maintaining orderly competitive conditions among milk processors and milk producers.
The development of steril ized aseptically-packaged cream accentuates this need
for pricing consistent with orderly marketing criteria. Orders have not recognized either the influence of market responsiveness on producer returns or the
need for consistency with orderly marketing criteria for product classification.
Effect of Classification Pricing Pol icies
on the Market for Cream
The purpose of this section is, given the elasticity of demand estimates
for light and heavy cream, to analyze the effect of various pricing proposals
14/
G. E. Brandow, Interrelations among Demands for Farm Products and Impl icatrons for Control of Market Supply, Pennsylvania State Agric u ltural Experiment Station Bulletin 680, University Park, August 1961, p. 17.
- 15 -
on the retail price of cream and on the market demand for cream.
The cost of cream is the most important component of the total cost of the
cream product to the consumer. While general ization is difficult and somewhat
presumptuous, analysis of data in the Fluid Milk and Cream Report indicates that
cream costs normally constitute about 50 percent of the wholesale price of cream
and 33 percent of the retail price. Thus, changes in the price of cream at the
processor level are almost immediately reflected in a change in the retail price.
A change in the retail price, as indicated in the previous section, directly affects the quantity of cream products demanded.
Milk used for cream may be classified in anyone of three ways. First, it
may be classified with manufactured dai ry products. Second, it may be classified in an intermediate class such as is done with cottage cheese in many markets.
Third, it may be classified with fluid milk as Class I. The effect of these
alternative classifications on the price of I ight and heavy cream is indicated
in Table 5. The prices in Table 5 assume that the manufacturing price is equal
to the current support price of $4.65 per cwt. The intermediate class is assumed
to be the manufacturing price plus $.50 per cwt. Class I price calculations are
made for price levels of $6.50 per cwt. and $7.50 per cwt.
It is apparent from Table 5 that a change in classification from the manufacturing price to the Class I $6.50 or $7.50 price results in a substantial increase
in the cost of cream to the processor. The cost per pint for I ight and heavy
cream and the resulting percentage change in price at the wholesale and retail
levels are indicated in Table 6. The assumption in Table 6 is that there is a
constant processor-retailer margin of 25 cents per pint for I ight cream and 20
cents per half-pint for' whipping cream. This margin varies from market to market
but appears to be fairly representative of the markets reported in the Fluid Milk
and- Cream Repo.t. It can, of 'course, be adjusted for any particular market situat ton .157
The data in Table 6 indicate that if the processor-retailer margin is a
constant 25 cents, a change in classification of I ight cream from the manufacturing level of $4.65 to the Class I level of $6.50 will increase the retail price
by4.5 percent.
In the case of heavy cream a similar change in classification
would increase the retail price by 2.8 percent.
If the Class I price was $7.50,
the percent increase in the retail price would respectively be 7.4 and 4.4 percent.
An increase in the retail price decreases consumption. A consumption
decrease in turn affects the revenue which the retailer obtains from cream. For
example, if the percentage increase in price resulting from a change in class.ification is greater than the percentage decrease in consumption, total revenu~
to the retailer and producer will increase even though consumption declined._I_bl
In order to estimate the consumption response to different methods of
classification, the price elasticities estimated previously for I ight and heavy
151
In certain markets data indicate that the processor-retailer margin is
approximately double the cost of cream. Such pricing behavior would
tend to substantially increase the percentage change in the retail
price when compared with the constant margin used in this study.
161
See addendum for relationship between prices and total revenue.
- 16 -
Table 5.
Cost of heavy and 1 ight cream per cwt. in various price classifications with a fixed butterfat
differential of 8.0 cents per point.
Price
Classification
Pr ice
of Mil kl!
Cost of 2
Light Cream-!'
Cost of
Heavy Crea,J!
--------001 lars per hundredweight--------Manufacturing
4.65
Manufacturing + 50¢ 5.15
Class I
6.50
Class I
7.50
11.75
II .95
13.30
14.30
29.75
30.35
31.70
32.70
1/ Milk prices are based on a3.5 percent butterfat content.
2/ Light cream cost calculations assume a 12.5 percent butterfat content.
3/ Heavy cream cost calculations assume a 35 percent butterfat content.
TabJe 6.
Effect of classification on the cost of one pint
1 ight and one-half pint heavy cream, processorretailer margins, retail price, and the percentage
change in price assuming a fixed 8-cent butterfat
differential.
Price of Milk
4.65
5.15
6.50
7.50
-------------cents-------------
Light cream in pints
Cost of cream
Processor-retailer margin
Retail price
12.6
12.8
14.3
15.4
25.0
37.6
25.0
37.8
25.0
39.3
25.0
40.4
Percent increase in retail
price from $4.65 price
level
Heavy cream in half-pints
Cost of cream
Processor-retailer margin
Retail price
------percent-------.5
4.5
7.4
-------------cents------------16.0
16.3
17.0
17.6
20.0
20.0
20.0
20.0
36.0
36.3
37.0
37.6
Percent increase in retail
price from $4.65 price
level
- 17 -
------percent------.8
2.8
4.4
cream were used. Consumption responses for two alternative methods of classification and price levels are indicated in Tables 7 and 8. Table 7 indicates
that for markets presently pricing milk used in cream at the manufacturing level,
a change in classification to the $7.50 Class I level would increase the price
of 1 ight cream by 7.4 percent and decrease consumption by 5.92 percent . A similar change for heavy cream would result in a 4.40 percent decrease in consumption.
Table 8 indicates that for markets presently pricing cream at the $6.50
Class I level, a change in classification to the $4.65 manufacturing level would
result in a I ight cream consumption increase of 3.44 percent and 2.70 percent for
heavy cream.
The final column in Tables 7 and 8 indicates the annual consumption change
in terms of mil I ion pounds which is associated with the percentage change in
price. This quantity change is based on the total quantity of I ight and heavy
cream consumed in state and federal order markets in 1967, the last year for
which comparable consumption data are reported. The calculation of the final
column assumes that all cream in all markets is priced at the level indicated
in the respective table headings. From Table 8 it can be seen that if the Class
I price was $6.50 for milk used in cream in all markets, a change in classification to the manufacturing level would result in a 16.75 million pound increase
in I ight cream consumption.
Effect of Classification Pricing Pol icies
on the Dairy Farmer
Classification and pricing pol icy with respect to cream does affect the
dairy farmers'" income.
Income can be affected in two ways. First, it is affected
by the change in prices and the corresponding change in consumption which occur
when a classification or price change is made. Second, it is affected by the
effect which a change in consumption has on the manufacturing milk price level.
This price is, in turn, related to the federal order prices in the dairy industry .
The total effect on producers is a composite of the two effects.
Returning now to the first effect of a change in classification or pricing
pol icy on dairy farmers, the total revenue which producers receive is a function
of both prices and consumption.
If the elasticity of demand for a product is
less than 1.0 it means that the percent decrease in consumption resulting from
a price increase is less than the percent increase in price. As a result, when
prices are increased total revenue increases.
If the demand elasticity is greater
than 1.0 the percent decrease in consumption will be greater than the percent
increase in price. As a result, revenue will decl ine as the price of the product
is inc rea sed.
In the present study the elasticity of demand for 1 ight cream was found to
be -0.8 and the elasticity of demand for heavy cream -1.0. An elasticity of
demand for heavy cream of -1.0 means that the percentage change in price will
be exactly offset by the percentage change in quantity. As a result, total revenue
will not change as a result of a change in the price of heavy cream. That is,
a 10-percent reduction will be exactly offset by a 10-percent increase in consumption of I ight cream. This relationshi~ is indicated in Table 9 where it is
assumed that the Class I price level for al I markets is $6.50. The revenue for
heavy cream ~t this price level is 41.4 million dollars.
tf the heavy cream
- 18 -
Table 7.
Expected consumption response for various price
levels with a price elasticity of -0.8 for light
cream and -1.0 for heavy cream for markets
currently pricing cream at the manufacturing
level of $4.65 per cwt. of milk.
Cream Product
and Milk
Price Level
Reta i 1
Price
Change
Consum~tion Change 11
Elasticity
Percent
(Percent)
Quantity
mil.lbs.
Light Cream
$5.15
$6.50
$7.50
+ .5
+4.5
+7.4
-
Heavy Cream
$5. 15
$6.50
$7.50
+ .8
+2.8
+4.4
-1.0
-1.0
-1.0
.8
- .8
.8
-
.40
-3.60
-5.92
-
.80
-2.80
-4.40
-
1. 95
-17.53
-28.83
.60
- 1 .9:4
- 3.05
1/ Annual change in consumption based on 1967 annual light
cream consumption of 486,910,000 pounds and 1967 annual
heavy cream consumption of 69,350,000 pounds
Table 8.
Expected consumption response for various price
levels with a price elasticity of -0.8 for 1 ight
cream and -1.0 for heavy cream for markets currently
pricing cream at the $6.50 Class I level.
Cream Product
and Mj' 1k
Price Level
Reta i I
Price
Change
(Percent)
Consumption Change!!
Light Cream
$4.65
$5. 15
$7.50
-4.3
-3.8
+2.8
-:-
Heavy Cream
$4.65
$5. I 5
$7.50
-2.7
-1.9
+1.6
Percent
Quant i ty
mi1.lbs.
.8
+3.44
+3.04
-2.24
+16.75
+14.80
-10.91
-1.0
-1.0
-1.0
+2.70
+1.90
-1 .60
+1.87
+1.32
-1 . 1I
Elasticitl:
.8
- .8
-
1/ Annual change in consumption based on 1967 annual l ight
cream consumption of 486,910,000 pounds and 1967 annual
heavy cream consumption of 69,350,000 pounds
- 19 -
prices were lowered to either $5.15 or $4.65, consumption would increase just
enough to offset the price decline leaving total revenue constant at the 41.4
mill ion dollar level. Thus, while the consumption of heavy cream has increased
by 2 mill ion pounds as a result of a change to manufacturing classification
(Table 8), total producer revenue from heavy cream remains constant.
In the case of 1 ight cream a change in classification to either the $4.65
or $5.15 level would reduce revenue from cream (Table 9). This reduction in
revenue results from the fact that the demand for 1 ight cream is somewhat inelastic. That is, a demand elasticity of -0.8 means that a 10-percent decrease
in price will result in an 8-percent increase in light cream consumption. The
result in the case of a change in classification from the $6.50 Class I level
to the manufacturing level is a 2.0 mill ion dollar decrease in revenue from
1 i ght cream.
Assuming a $6.50 Class I price, the conclusion reached from this discussion
is that revenue from both 1 ight and heavy cream would decl ine by 2.0 mill ion
dollars if the classification was changed to the manufacturing price of $4.65 .
This decrease in revenue must, however, be weighed against the increase in
the manufacturing price which would be expected to result from increased cream
consumption at the new lower price level.
Where the effect of a price decrease is to substantially increase consumption, the manufacturing price would be expected to rise. This rise in the
manufacturing price results from the increased consumption of cream when the
price of cream is lowered. The rise in the manufacturing price may either be
revealed in the form of increases in the price of butter and powder when prices
are above support levels or increases in support prices when prices are at the
support level. The flexibil ity of the manufacturing and support prices is well
illustrated by the upward movement of both during recent years, in the face of
decl [ning production. A similar upward movement would be anticipated to occur
with increases in cream consumption.
The price elasticity information provides a basis for estimating the effect of increased cream consumption on the manufacturing price of milk. Such
an ~stimate can be made on the basis of the following formula:
E = 6Q
KP
P
Q
In this case E is the price elasticity of demand for manufactured dairy products which has generally been placed in the range of -0.5 to -1.0. An elasticity of -0.8 for manufactured products is used here., The price used is the
present support price of $4.65. In 1968, 43.85 billion pounds of milk were used
for manufacturing purposes. Our previous analysis indicates that if cream were
classified at the manufacturing price rather than at the $6.50 Class I price,
1 ight cream consumption would increase by 16.75 mill ion pounds, and heavy cream
consumption would increase by 1.87 mill ion pounds; that is, 77 mill ion pounds in
terms of milk equivalent. The equation thus becomes:
77 mill ion pounds
-.8
x
$4.65 per cwt.
43.85 billion pounds
- 20 -
Table 9.
Change in revenue from cream resulting from
a change in the classification of 1 ight and
heavy cream.
Cream Item and
Price Change
Total Revenue
$6.50 Price
Total Revenue
New Pr ice
Change in
Total Revenue
--------------mi 11 ion dollars-------------Light cream
6.50 to 5. 15
6.50 to 4-.65
191 .4
191.4
189.6
189.4
-L8
-2.0
Heavy cream
6.50 to 5.15
6.50 to 4.65
41.4
41.4
41.4
41.4
0
0
The value of X, the estimated change in the price of manufacturing milk,
is then calculated to be 1.0 cents per cwt. Since the one-cent increase in
the price of milk resulting from increased cream consumption would be effective
to the extent of all milk marketed in the United States, the total effect would
be to increase producer revenue by .11.5 million dollars.
Considering these two effects upon consumption, the total effect of the
change in classification of 1 ight and heavy cream from the Class I to the manufacturing level would be an annual increase in revenue of about 9.5 million
dollars. 17/
17/ This is a conservative estimate since the 1 cent increase in the price of
all mTTk would result in increased revenue from milk used for bottling purposes.
- 21 -