June 14, 2004

 

 

U.S. Milk Prices Rise

 

The cost of milk is rising, with U.S. wholesale prices more than doubling since last year and some hitting record highs this month.

 

And there are peculiar parallels with the factors driving up prices for gasoline. In both cases, production has been strained by a lack of capacity, be it too few refineries or dairy herds downsized too vigorously when milk prices crashed this decade. Rampant speculation is also driving up prices for each, said Christopher Galen, a vice-president at the U.S. National Milk Producers Federation.

 

Milk is more costly because of traders wondering when the United States might reopen its border to Canadian dairy cows, barred since a case of bovine spongiform encephalopathy, or mad-cow disease, was discovered more than a year ago in Alberta.

 

The wholesale price for fluid milk is US $19.65 a hundredweight (hundred pounds), more than double that of May 2003. Similarly, the wholesale price for milk used in cheese jumped to $20.58 a hundredweight this month, more than double that of a year ago.

 

The cost of a gallon of milk is nearing $3.50 in some markets, with the cost of ice cream, cheese and other dairy products marching upward.

 

Milk costs are relatively stable in Canada, a result of the country's quota system and government-set prices. Wholesale costs rose 3.5 per cent in February, and are not scheduled to rise again until February 2005.

 

Canadian ranchers usually ship 50,000 animals southward each year. That is equivalent to just one-half of 1 per cent of the total U.S. dairy herd of nine million animals. But those shipments are equal to up to 50 per cent of the new animals needed each year to maintain the herd size. And in that sense, their absence is a major blow.

 

The BSE disruption comes on top of a host of other price pressures, including the impact of China's roaring economy -- another parallel with the dynamics of the crude market, where that country's demand for oil has helped to keep prices at lofty levels.

 

The price of milk is also being affected by the Chinese demand for soybeans, a major source of cattle feed that is adding to the price increase. The rising cost of energy plays a small role, and a shortage of a popular dairy growth hormone from Monsanto Co.

 

But Mr. Galen said the biggest factor remains speculative buying, based on when Canadian cattle will again cross the border. Prices will fall with a change in the market's mindset.