June 1, 2007

 

Higher fuel, corn costs push US dairy prices up

 

 

Dairy market forecasters are warning American consumers of a possible sharp increase in dairy prices this summer. By June, the milk futures market predicts, the price paid to farmers will have jumped 50 percent this year due to higher costs of transporting milk to market and increased demand for corn to produce ethanol.

 

The US Department of Agriculture says US retail milk prices have increased about 3 percent, or roughly a dime a gallon.

 

But University of Illinois dairy specialist Michael Hutjens forecasts further rise of up to 40 cents a gallon for milk during the next few months which could drive up to an average of US$3.78 per gallon based on USDA's monthly survey of milk prices in 30 metro areas.

 

An increase of up to 60 cents for a pound of cheese can also be expected, said Hutjens.

 

Prices in the last USDA survey, earlier this month, ranged from US$2.76 a gallon in Dallas to US$3.86 in Chicago and US$4.09 in New Orleans, where the dairy industry has struggled to bounce back from Hurricane Katrina.

 

Hutjens and others said higher gasoline prices have driven up the costs of moving milk from farm to market. Corn-the dairy cattle's primary feed-is being gorged by producers of the fuel-additive ethanol. The USDA projects that 3.2 billion bushels of this year's corn crop will be used to make ethanol, a 52 percent increase over 2006.

  

Chris Galen, a spokesman for the National Milk Producers Federation, pointed to another factor: Global demand for milk, he said, has grown in the past few years, with the emergence of Asian economic powers such as China wherein the country consumes more milk proteins and uses dairy ingredients for animal feed.

 

Huge Chinese dairy demand has been filled by Australia and New Zealand in the past but drought has pushed China and its Asian neighbours to look for American dairy.

 

Hutjens said the biggest dairy price spikes are likely to come later this summer in the areas farthest from the Midwest corn and grain fields that feed most of the country's dairy cattle.

  

The USDA doesn't survey prices in California because the state sets minimum farm-level prices, skewing retail dairy prices. But those retail prices are near US$4 a gallon in many cities there, too.

 

Von's, one of the major chains operating in California, charged US$3.99 for a gallon of whole milk at its Los Angeles-area stores on Wednesday.

 

Like consumers, companies that use milk, cheese and other dairy products are expecting to spend more the rest of this year.

 

Hershey Co., the country's biggest candy maker, recently scaled back its earnings expectations for this year, due in part to higher dairy costs. Kraft Foods Inc. has raised prices earlier this year on some dairy-based products.

 

Similarly, Domino's Pizza recently said that it expects to pay more through the rest of this year for the melted cheese on its more than a million pizzas daily. But Domino's says it probably won't raise the price of a pizza because its industry is too competitive, spokesman Tim McIntyre said.

 

Competition might be the best guard against rapid increases in retail dairy prices, too, said the Milk Producers Federation's Galen.

 

Mass-market retailers such as Wal-Mart, Target and Costco, he said, often sell milk at cost to pull in customers, making their money elsewhere. This system tends to limit how high grocers can raise their prices for milk.

 

The last dramatic dairy price increases were in 2004, when -- after a period of low prices -- production fell and many farmers left the business, Galen said. The increase was sharp, he said.

 

This time, prices appear to be heading for a more sustained plateau, Galen said.