June 27, 2007

 

Ethanol boom may push US milk prices to record high

 

 

Milk prices are seen to reach all-time highs in the next few months due to rising costs of corn for ethanol and the fallout from the increasing price of oil.

 

The foreseen milk price hike will also include dairy products such as yoghurt, cheese, pizza and ice cream which could pressure manufacturers, grocery and restaurant owners to raise its price in its products.

 

Nationally, the average cost of a gallon of whole milk rose 19 cents during the past two months, to US$3.26 in May, according to the US Department of Labour. In Baltimore, the May average was US$3.42 - up from US$3.16 in March, according to the US Department of Agriculture. Higher prices have continued this month: One area supermarket priced a gallon of whole milk at US$3.99 yesterday.

 

Dairy analysts said ethanol drive is the biggest factor for higher milk prices this year with foreign oil costs continue to soar, prompting to source other alternatives for fuel. Corn growers are working to fill the demand since the price for that crop has risen.

 

Larry Salathe, a senior economist with the US Department of Agriculture, estimates that US milk shoppers could be paying 26 cents more per gallon during the next month. That would be near the US average peak price of US$3.57 a gallon set in June 2004. Based on milk data newly released by the federal government last week, Salathe projects an increase of 82 cents per gallon compared with 12 months ago.

 

Though dairy prices typically rise this time of year, the combination of higher corn feed for cows, rising oil costs, international demand and a drought in Australia could make it one of the worst seasons for milk prices, commodity analysts said.

 

Sheldon Garvida, an analyst of the dairy cattle and milk production market with the US Bureau of Labour Statistics, said farmers are diminishing their herd sizes because of rising feed costs. He said the move to produce more ethanol is forcing dairy farmers to pass along the added cost to customers.

 

James Vona, president of Frederick-based Dairy Maid Dairy Inc., said the 26 percent increase he has seen in raw milk since January is directly related to ethanol use.

 

The USDA reports corn prices are predicted to reach US$4.04 a bushel by December, The price per bushel was US$3.74 in May and US$3.03 in October.

 

There are other international factors pushing up milk prices as well such as grain losses in Australia -- a major global milk supplier -- due to drought. Severe hot conditions have also ravaged main grain trader Ukraine and other European countries.

 

Unexpected demand for milk over the next two to three months from India or China, would be "very explosive" to the dairy farmers of those nations, according to reports filed by Dairy Australia, a Melbourne operation that monitors the continent's dairy industry.

 

Because Australia is one of the United States' biggest competitors on exports and the value of the dollar has fallen versus other foreign currencies, international concerns are greater than they have been in past years, Garvida said.

 

In the United States, New Orleans recorded the highest price for a gallon of whole milk in May at US$4.09, according to a USDA study of 30 cities. Chicago had the second-highest price in May at US$3.86. Dallas was the lowest with US$2.76 a gallon.

 

Howard Leathers, an associate professor of agricultural and resource economics at the University of Maryland, College Park, said the difference in regional prices typically comes from the transportation costs as milk is costly to transport due to its bulk and higher oil costs.

 

Some local dairy farmers said the recent price spike could help them as many operators grow their own corn. They admit, however, that such economic benefits never last and they expect prices to retreat sooner or later.

 

Kate Dallam, owner of Broom's Bloom Dairy in Bel Air said though "there are peaks and valleys in the way dairy farmers are paid, we know it will all come down eventually."

 

The higher prices at the moment, however, are forcing such companies as Nestle, Unilever and Groupe Danone - three businesses that rely on milk to produce their food products - to note the rising costs in their financial reports recently. Unilever is the parent company of the makers of Country Crock butter and other spreads as well as Klondike, Good Humor and Breyer's ice cream. Groupe Danone is best known for its yogurt products.

 

A spokeswoman for Domino's Pizza said the chain might be forced to pass on higher costs to consumers. The company said last month that rising cheese prices hurt revenue during the first three months of the year.