Why are milk prices so high?

As part of work I have the opportunity to answer customers' questions and resolve customers' concerns. Below is a message I received from a lady who is a small-business owner in Alaska and my response to her.

Customer Message:

I own one of the many espresso drive thrus in Anchorage, AK. I have been purchasing most of my supplies at the East Side Sam's. I am concerned that the dairy prices have gone up dramatically in the past few weeks, more so than at other local stores, including Wal-Mart, Carr's/Safeway, and Costco. Milk was $2.99 a gallon, now it's about $3.79. . . Ludicrous!

I realize that fuel prices have gone up, which translates into more costs for shipping goods to Alaska, but this milk increase is as outrageous as the increase at the gas pumps. Sam's is going to severely hurt the "little guy," like espresso drive through owners. Can't you change your mode of transportation, your carrier, your dairy supplier, or do something????

I am not the only small business who is complaining. I believe that Sam's will feel the decrease of business if prices continue to sky rocket. But then, that's your problem, right?

Check my record. I spend a lot of money for a small business, at Sam's. I am disgruntled, frustrated, and do NOT want to start using powdered milk. DO SOMETHING to make this more equitable. My local Sam's says they can do nothing, that I have to write to the main office.

And so I have. I don't want a generic, computerized response. I want to know what Sam's is going to do about dairy prices? If Safeway, Costco, and Wal-Mart can beat your prices, what does that say?

Thank you,
A Frustrated Customer

Dear Frustrated,

Thanks so much for sharing your concern with us. You can rest assured you are not receiving a generic computerized response. We appreciate small business owners like you, especially when they shop at Sam's Club! We know how hard you work, how much low prices mean to you, and how Sam's Club performs affects your business in a very real way.

As I read your note I extracted two main concerns: 1) increasing milk prices and 2) competitors having lower prices than Sam's Club. These two concerns may seem like one and the same, but in fact they are different and distinct as I explain later. From your note I also extracted that you're an astute businesswoman who understands business and the costs of doing business. Hopefully my responses will resolve your two main concerns.

Increasing gas prices are impacting dairy prices indirectly but are not the driving factor. A major drought in Australia has caused China to look elsewhere for its milk supply, namely the United States. This has caused the demand for American milk to be increased dramatically.

At the same time, because of increasing prices of gas, people are looking for alternative methods of fuel like ethanol, which is made of corn. As the demand for corn increases faster than the supply of corn increases, the price of corn increases. Corn is the main source of feed for dairy farmers' cows. The increasing corn costs for farmers is making dairy farming too expensive for some farmers, forcing them to reduce their herds or to leave the dairy farming business altogether. Overall American supply of milk is being reduced.

Increasing demand for American milk, coupled with a decreasing supply of American milk is raising milk prices throughout the entire United States. Sam's Club (and Wal-Mart for that matter) cannot control the macroeconomic factors discussed above. One could say we're given the playing field we play on.

Even though we don't control the playing field we do control how we play the game. In other words Sam's Club can control its prices compared to the other retailers in town. Our philosophy is to be the lowest price in town ceteris paribus (all other things being equal). Our computer system shows the milk prices at your club to be $2.99 for skim, $3.29 for 2%, and $3.50 for Vitamin D. Our system also shows Fred Meyer has skim, 2%, and vitamin D for $3.50 a gallon. Costco is selling two gallons of skim for $5.99 ($2.995 a gallon), two gallons of 2% for $6.59 ($3.295 a gallon), and two gallons of vitamin D for $6.99 ($3.495 a gallon). As you can see we are very competitive.

Thanks again for your concern. I am really happy you're a member at Sam's and choose to buy from us for your business. As a businessperson I understand the importance of time and money, and I assure you we're trying to save you time and money. I, with you, am hoping dairy prices come down soon but the forecasts I've seen estimate milk prices to increase for the next three months. If you have any more questions or feel the need to discuss anything I've mentioned you can call me at 479-277-8089.

Benn Manning