Dairy prices have risen rapidly this year due to a number of factors, but analysts say retailers can expect relief by 2008
This year, there have been major spikes in the price of animal feed due to the corn-based ethanol boom; fuel and electricity costs have remained stubbornly high; and droughts and extreme heat have ravaged farmland throughout the country. It would be a tough time to be a dairy farmer, if overseas demand weren't growing so quickly.
“The main reason that milk prices are so high is because of worldwide demand for dairy products — it's just unbelievable what's going on,” said Roger Hoskin, an agricultural economist for the U.S. Department of Agriculture, Washington.
“Some people try to hang this on ethanol, and I don't think that's the main reason this year.”
With China's rapidly growing economy and its newly acquired taste for dairy products — such as cheese in cheeseburgers and milk in coffee — growing demand and limited supply have pressured dairy prices upward. Droughts in Australia and New Zealand, as well as the European Union's reduced subsidy system, have also contributed to supply shortages and have put more pressure on the U.S. to fill that demand.
“We're going to be in a situation this year where we may actually have some commercial exports of butter, which is almost unheard of, but right now we're the U.S. dairy store and not quite, but almost, the only game in town.”
The average price in August was $3.87 per gallon of whole milk, a 1.8% increase from July's $3.80, according to the USDA's survey of 30 cities throughout the country. The USDA's average was 7 cents higher than the number reported by the U.S. Bureau of Labor Statistics, which records data from a broader sample.
Maria Brous, spokeswoman for Publix Super Markets, Lakeland, Fla., noted that other factors have made milk particularly expensive in certain regions.
“Reasons for the rise in prices include the Department of Agriculture raising the destination charge for raw milk out of Wisconsin,” said Brous. “Florida and California were hit especially hard, because we're farthest away. The price of corn is on the rise because it's used for ethanol fuel — and fuel costs are high, so it's expensive to truck raw milk across country.”
However, Hoskin, citing the dairy industry's cyclical nature, said that farmers looking to take advantage of these higher prices will inevitably ramp up production. As supply grows, prices will fall.
“Farmers look at these high prices and they're going to produce more milk,” Hoskin said. “We're getting some increase in cow numbers, so we expect a slight increase in the population of cows into next year. It's not huge, at least at this point; we're not forecasting a big change, but there'll be higher numbers, and that should give us a little more milk next year. We're not going to get a big relief in prices like last year, but we should get some drop-off.”
Rick Kment, dairy analyst at Omaha, Neb.-based DTN, a business information provider, agreed with Hoskin's forecast.
“I think we've seen our peaks, and we will probably hover at these high prices through the end of the year, with prices moving back to just above five-year averages by the middle of 2008, assuming that we don't see significant increases in energy and feed prices in that time,” Kment said.
Kment said he thinks that the drastic increases in milk prices over the past couple of months have also made it easier for retailers to pass along some of the increases related to higher energy costs.
“I think retailers have had to eat the cost at some point over the last couple of years, but with these increases in price over the last several months, they've been able to work some of that into [retail price] and pass those on to the consumers a little bit more than they have in the past,” he said.
Retailers have found themselves grappling with the usual problems posed by a rapidly rising commodity — either absorb the price increases at the wholesale level, trying to stay competitive and stay on the good side of shoppers, or hope consumers will understand the nature of the economy, and pass along some of those costs at retail.
“Increases in our retail prices have not kept pace with what we're paying, so we have not passed on these increases fully to the consumer,” said Michelle Owens, spokeswoman for United Supermarkets.
“We're eating some costs, and we have passed on a little bit of the increases, but not at the same pace as we've been paying it.”
Other retailers described a similar strategy.
“Milk prices are up 80 cents per gallon so far this year through July and are expected to continue to rise,” said Duane Proulx, vice president of grocery procurement for Chandler, Ariz.-based Bashas'. “Some of these costs have been passed on to consumers.”
Publix tries to absorb any price increases before increasing the prices at retail level, but is sometimes forced to pass some of the increase along to the consumer.
“As with any product, Publix first tries to absorb any price increases,” said Brous.
“Depending on the amount of increase and additional factors such as sourcing product — cows in Florida produce less milk during the summer due to the heat — transportation cost, fuel and so on, there may come a point where a consumer will feel the increase. The good news is it works both ways: When we receive a price cut or reduction, we also pass along the savings to the consumer.”
While prices have been going uphill for conventional milk, consumption remains steady in the United States, according to Hoskin.
“Fluid milk consumption has been running slightly ahead of last year, particularly on the low-fat and skim side,” he said. “Mostly, the low-fats and skims have done pretty well relative to whole milk products, but we've had a slight uptick in the consumption of fluid milk, and that's probably good.”
Kment said that since many consumers view milk as a staple, price increases haven't yet caused a significant decline in demand.
“Probably one of the main reasons is that the increase in dairy prices has not been significantly different than the increase in price in other comparable foods,” Kment said. “There's price sensitivity, but it has not been to the point that people have really reduced or quit using the product.”
However, buying habits may be shifting. For example, Kment said that consumers may opt for a half gallon rather than a gallon, because of how price-sensitive consumers are about milk.
“The fluid-milk market is probably one of the most price-sensitive markets, due to the fact that people kind of have an understanding and a historical perspective of what they have paid in the past for a gallon of milk,” Kment said.
“And it seems like the $4 benchmark has been a mental area for consumers, because it's been at $3.20, $3.30, $3.40. So it seems like consumers have kind of moved away from maybe buying a full gallon of milk at $4 to buying a half gallon. Even though the price per unit might be larger, it's just that sticker shock.”
While the dairy industry has been on a roller-coaster ride in the past couple of years, there is some relief in sight, according to industry forecasts.
“Next year, we kind of hope that things will get back to normal. But their outlook for the next year should be pretty good, even with these high prices,” said Hoskin.
“Producers are going to face high feed costs, of course, but I think that the prices that we're looking at will be adequately compensatory for most of them. Then we have to wait and see what happens after that.”
A surge in the supply of organic milk this spring, along with the spike in the cost of conventional milk, has narrowed the price gap between the products.
Some retailers are noticing shoppers trading up to organic as a result. At Lubbock, Texas-based United Supermarkets, for example, shoppers appear to be more willing to try organic brands.
“Really, that margin [between conventional and organic prices] has decreased, and as such, we've seen more switch to organic,” Michelle Owens, spokeswoman for United, told SN.
And, while Chandler, Ariz.-based Bashas' has not seen a significant shift in buying habits, Duane Proulx, vice president of grocery procurement, said he has seen increased awareness.
“There are more vendors supplying organic milk vs. last year, but sales are still less than 3% overall.”
The boom in organic production is due to stricter U.S. Department of Agriculture regulations that went into effect in June 2006, requiring dairy farmers who want to go organic to feed their cows 100% organic feed throughout their herd's transitional period. Previously, a mix of 80% organic and 20% conventional feed was allowed during the majority of the conversion period. A large number of farmers who had been on the fence about transitioning their herds began conversion in the spring of 2006 to make it under the deadline.
“The 80/20 feed exemption was necessary, as the organic dairy industry was growing and there was a limited amount of organic forage and grain available for transitioning farmers to purchase, so this one-time exemption made it easier for conventional dairy farmers to transition,” said Ed Maltby, executive director of the Northeast Organic Dairy Producers Alliance. Maltby estimated that there has been a 70% increase in organic dairy supply. This spike in supply will be short-lived, however.
“With spectacularly high prices for conventional milk … there has been very little incentive for producers to transition to organic,” Maltby noted. But “as dairy prices drop in early 2008, farmers will reconsider.”