US food industry set for price hike? - Brief Article

Eurofood, August 31, 2000

The possibility of huge price increases in the US has become very real, a situation, which is highlighted by the current high price of milk in the US. Two supermarket chains in Chicago, Jewel and Dominick's, are currently charging record high prices for milk, around US$3.69 (4.07 [European Dollar]) for a gallon of whole milk.

Some industry analysts in the US believe that similarly high prices could be charged for other food products. There is a trend of mergers sweeping through the US supermarket industry, which has seen 40% of all grocery sales become controlled by only five companies, it used to be ten companies five years ago. Market consolidation could lead tosignifcant price fluctuations.

However, what is important regarding the milk prices is that the price of raw milk has fallen significantly over the last two years. US government surveys show that dairy processors are paying dairy farmers up to 26% less for milk, and the cost of lesser quality milk used for making cheese has plummeted 42% whilst cheese prices have remained stable. However, companies such as Suiza Foods, the largest dairy producer in the US, which manufacture products including cheese, yoghurt and ice cream, claim that they are not benefiting from the huge price hikes, but moreover these benefits are being passed on to the stores.

MILK TRADITIONALLY A CHEAP PRODUCT

In the US, basics such as milk have traditionally been sold cheaply to entice customers into the stores. However, retailers are now hoping to use the dairy sector to drive up their profits and industry analysts point to the strong competition and consolidation in the retail and supermarket industry in explaining the reasons behind high prices for milk. This is the case of the supermarkets in Chicago, where it is estimated that Jewel and Dominick's handle around 60% of all groceries sold in Chicago. Bigger fish acquired both these chains within the last two years. Jewel supermarkets became part of the Albertson's Group, the second biggest supermarket chain in the nation, and the third largest Safeway Inc acquired Dominick's. The two parent companies set the price of milk in the stores, therefore other retailers in the area can justify charging similar prices. Market research shows that citizens in Chicago pay 30% more for their milk compared to citizens in Milwaukee, situated 30 miles away, despite the fact that both cities milk supplies originate from the same farms. However, neither retailer is backing down or showing signs of a change in its pricing policy, claiming their prices are competitive, and that a cheaper value range of milk is available.