May 19, 2004

 

 

US Milk Prices At All-time High

 

After two years of a depressed market, a combination of factors including lower production and higher feed costs are driving up milk prices to all-time highs, Gary Lee, vice president of procurement for Prairie Farms in Carlinville, said. A gallon of milk today runs 60 to 70 cents higher on the retail shelf than last year.

 

"What happened in recent months are several things," Lee said. "We came out of two years of very low milk prices which forced a lot of dairy farmers to quit. So far in 2004 milk production is running 2 percent below last year while total consumption has been growing at 2 to 3 percent a year."

 

Further cutting into production and creating shortages was last year's bovine spongiform encephalitis, or "mad cow" scare, which halted the shipment of dairy cows from Canada-a primary source of milking cows for U.S. dairy farmers.

 

"U.S. dairy farmers are no longer able to import dairy cattle from Canada," Lee said. "There are fewer cows producing milk today."

 

Estimates are that the total U.S. herd of about 9 million was culled by more than 150,000 the past year. Jim Fraley, manager of the Illinois Milk Producers Association, said there are 110,000 head in Illinois, down from 120,000 in 2000, producing 2 billion pounds of milk annually.

 

Lee said the depressed market of the past few years was devastating to dairy farmers. Many gave up, selling off their cows or sending them to slaughter. Some switched to other types of farming.

 

"The country was losing 5,000 dairy farmers a year for the past two to three years," Lee said, adding that Illinois was losing 11/2 of its 1,000 farms a week."

 

Fraley said some of those losses came with incentives for farmers to get out under a program called "Cooperatives Working Together" in which dairy farmers contributed money to buy out others in an effort to move prices upward.

 

"It's farmer-funded. Producers pitch in to encourage other dairy farmers to retire their herds. That has had an impact," Fraley said. "Coupled with the other factors coming together at the same time it reduced the supply a little bit. We have a steady demand all the time. If we are under-or over-supplied the market responds accordingly."

 

Milk prices are based off of the prices of butter, cheese and skim milk powder set at the Chicago Mercantile Exchange, Lee said. Those values are then used by the United States Department of Agriculture in a formula to set a base price. Class 1, or fluid milk, like the kind found at the supermarket, carries a premium above basic values.

 

"With a fairly fixed demand and lower production we end up with prices being bid up," Lee said.

 

What is bad news for consumers, however, has dairy farmers brimming. John Smith, a Perry County dairy farmer, said he anticipates getting $1.60-$1.70 for a gallon of raw milk sold in May-more than double from a year ago.

 

"The last two years farm prices were at record lows and a lot of dairy operations lost a lot of money," Smith said as he finished the first of two daily rounds of pumping milk out of his 80-head herd. "There was no profit in it especially when you consider living expenses. Some quit; they just got out of it. That made ours more valuable."

 

But that does not mean Smith's profits have doubled. Feed is also at high levels and accounts for 60 percent of a dairy farmer's overhead.

 

"We are paying more for fuel and feed," he said. "It's not been all cream for dairy farmers."

 

Smith said the milk shortage attracted speculators to the commodity market.

 

Speculators got into dairy and drove prices up," he said. "Our markets are definitely becoming more volatile."

 

Lee predicts prices will start coming down in a few months but consumers should not expect them to return to 2003 ranges.

 

"At least for the moment all factors allow to have a big run up in prices," Lee said. "I think for the balance of 2004 there will be some falling back but prices will still be higher than a year ago.

 

Added Fraley, milk prices are very cyclical.

 

"We are already seeing predictions of more milk supplies on the market," Fraley said. "It will ease the short supply by the end of the year."