September 21, 2007

 

Analyst: US dairy prices may drop in 2008

 

 

A dairy industry analyst on September 20 projected that dairy prices will drop by the second quarter of 2008 that will ease consumers and companies some relief on record high-milk costs.

 

However, dairy prices are still expected to remain above historical averages, according to Jerry Dryer, a market analyst at Rice Dairy LLC, a brokerage firm specializing in the dairy market.

 

Raw milk prices have been on the rise partly because of higher feed costs and fuel to transport milk to producers. If farmers have to pay more to feed cows and transport milk to dairy producers, they charge more for the product, says Dryer.

 

In addition, low milk costs in 2005 and 2006 helped spur demand in the US as companies and food service providers promoted dairy products, and demand for milk around the world increased, pushing prices higher.

 

Dryer said demand is not showing signs of slackening, particularly in the international markets since a weaker dollar has made products from the US a better value.

 

Dairy production, meanwhile, is only now starting to catch up as production increased by 3.4 percent in August after rising 1 percent in the first half, said Dryer.

 

The increase should help lower prices from year-ago levels, even if they remain historically high, he added.

 

Cheese, for example, will most likely cost US$1.65 per pound in 2008, Dryer said. That price is lower than in June when it hit US$2 per pound, but still higher than the five-year average of US$1.37 per pound.

 

UBS analyst David Palmer said on the call that even if dairy costs don't drop below their historical averages, the lower prices year-over-year should mean companies that use a lot of dairy could see earnings rise if higher fuel costs don't offset the gains.

 

Palmer singled out fast food operator Yum Brands Inc., coffee chain Starbucks Corp. and food maker General Mills Inc. as three of the biggest potential beneficiaries of the lower costs.

 

Lower costs could also mean a drop in prices for consumers. Starbucks recently raised prices on its gourmet coffee drinks, citing higher diary costs.