April 11, 2007


Increased demand in dairy ingredients, high feed prices escalate milk prices


The surge in demand for US dairy and its ingredients as well as rising corn and soybean prices has pushed up milk prices to record highs recently, according to the International Dairy Foods Association (IDFA).


IDFA President and CEO Connie Tipton said strong international demand and short global supply of nonfat dry milk, dry whey and lactose have steadily driven prices in the past six months, noting prices of nonfat dry milk has gone up by 30 percent and the price of dry whey is twice as high before the current run-up in prices.


The prices of nonfat dry milk and dry whey are used by the US government as components to identify the minimum, government- regulated price that milk and dairy companies must pay for all farm milk within the Federal Milk Marketing Order system. As a result, when prices rise for these dairy ingredients, all farm milk prices increase.


At the same time, increased demand for corn to produce ethanol is causing feed costs to escalate. Feed is the largest operational cost for dairy farmers.


Tipton explained ethanol production has farmers divert its land to corn that used to be used to grow crops for cattle feed.


She said feed costs are not to drop anytime soon as corn futures market prices indicate a relatively high price of crop this year as well as with soybeans.


Finally, the lower farm milk prices of 2006 resulted in a slowing of the growth of total milk production in the United States, with less milk coming from dairy farms into the supply chain. Lower production, coupled with strong demand both here and abroad, has contributed to the higher prices.


Dr. Bob Cropp, professor emeritus at the University of Wisconsin-Madison, predicts in his March 2007 Dairy Situation and Outlook report that "the milk supply/demand situation will become increasingly tight and will support higher milk prices in the months ahead."


Global market demand is expected to continue as well. Fonterra, a major multinational dairy company based in New Zealand, recently issued its most optimistic forecast ever, estimating that global demand for dairy products will grow 2.7 percent annually during the next 10 years.

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