Price Spikes and Oat Milk

By now you have probably seen a new milk substitute listed at your local coffee shop. Next to almond, soy, and coconut milk you can now find oat milk. You may have also noticed a price difference. At the coffee shop in my town, while the “traditional” substitutes are an extra 50 cents, oat milk costs you an extra $1. Ouch.

What is in oat milk? Why does it cost so much more? Who makes it? Why are people willing to pay more for oat milk than cow’s milk or other dairy substitutes. Those are some questions we will explore today.

First – What is in it? Oats and water. Next question.

Second – Why does it cost more? Here is where your simply supply and demand comes in. The ingredients and the basic steps to making oat milk are not super complex, but the process is more complicated for large suppliers of oat milk who have to make it shelf-stable for long-term storage. When oat milk first started to take hold in the US, or New York specifically, there was one main supplier, Oatly, and a few other firms too, including Pacific Foods which is the brand used at my coffee shop. These companies had capacity constraints and were unable to increase production quickly (in economic terms, elasticity of supply was pretty inelastic). Suddenly, the demand shot up with entry into the New York market and increases in popularity for the "milk;" in other words, a lot more people wanted oat milk at every price. Thinking back to one of your first lessons in economics: what happens when at a given price more people want to buy something than the firms are able and willing to supply? It’s called a shortage (quantity demanded is greater than quantity supplied).

With more people wanting to buy something than firms are able to supply at a given price, it puts upward pressure on prices. This is exactly what happened in the oat milk market. The price of oat milk on Amazon went from about $4.99 per carton to $16.50. That’s a 230% increase! Let’s think about this some more. People were out there desperate for oat milk. Some of those people couldn’t get it at the original ~$5 price but were willing to pay more for it. Now, as the price rose, I’m sure some people no longer wanted the oat milk (law of demand). Prices continued to rise until they reach a point where the quantity firms were able to supply equaled the quantity that consumers were willing to buy. A price of $16.50.

Over time, Oatly and other firms were able to respond and increase their quantity supplied of oat milk (elasticity of supply increases over time). Further, what else happened in the market? Firms entered! When firms are making an economic profit, others will want to enter. While Oatly has a patent on THEIR oat milk, it doesn’t prevent other firms from coming up with their own system for milking oats. Now when you search for oat milk, you find a host of other brands – including one by Quaker Oats. The biggest surprise to me is the newest entrant to the market coming in January of 2020… Chobani. Yes, the dairy-based yogurt company is entering the plant-based, dairy-substitute market. Talk about diversification!

Final question. Why are consumers willing to pay more for oat milk than they are for other milk substitutes? Quite simply: preferences are different. Oat milk provides a creamier alternative versus the more watery-tasting soy, almond, and coconut milks. Oat milk does have a, well, oaty flavor to it, but it is something you get used to after a few cups.

I have not made oat milk. But, the minimalist baker has! I trust their stuff, and it looks quite simple, so maybe you should try it out! Apparently, oat milk can be used in baked items, although I have not tested it out yet. I have seen various varieties of oat milk ice cream in the grocery store, and when I crack the code on making homemade oat milk ice cream, I’ll let you know!

I also have to confess… the pictures of the lattes above are with regular and not oat milk. According to my favorite barista, it is harder to make cool designs in lattes with oat milk because they do not hold as long.