Dairy Prices Continue To Rise Sharply

AMY SUNG

WASHINGTON — Prices for dairy products have risen steeply in recent months because of rising feed costs, strong export demand and short supply, and analysts expect those increases to continue through the summer.

The U.S. Department of Agriculture, which regulates the minimum milk prices received by farmers, recently set the price that processors will have to pay for drinkable milk in July at $20.91 per hundred pounds, a 17% increase from June and an 84% increase over last year.

“On June 22, the USDA announced the Class I minimum price mover — the minimum price that beverage milk processors must pay for farm milk used to make beverage milk products — for July as the second-highest ever,” said Susan Ruland, spokeswoman for the International Dairy Foods Association. “The record of $21.13 per hundred pounds of milk was set in June 2004.”

On June 1, the government announced that the Class I minimum price mover was $17.84 per hundred pounds, which was 66% higher than June 2006.

A major contributing factor to the rising prices in the U.S. is the higher cost of feed for dairy cows. Feed is the largest cost dairy farmers have in their operations, according to the IDFA, and corn prices have been high since the recent, sudden boom in ethanol production. Prices have also risen for soybeans, another feed ingredient.

Also, lower farm milk prices in 2006 triggered production cutbacks by major dairy producers, yet demand has remained steady, leading to higher prices, according to the IDFA.

Meanwhile, international demand for U.S. dairy ingredients has spiked because the European Union has ended its subsidy system for dairy exports, and a drought in Australia has resulted in lower-than-expected exports from there.

The price of nonfat dry milk went up about 30% in early 2007, and the price of dry whey doubled its previous record high before the current run-up in prices.

Because ingredients like nonfat dry milk and dry whey are “component prices” used by the government to determine the government-regulated minimum price that dairy companies must pay for all farm milk within the federal system, all farm milk prices have gone up.

In May, the average retail price of a gallon of whole milk in the U.S. was $3.26, up 6.2% from $3.07 a year earlier, the Wall Street Journal reported last week.

Based on futures contract prices on the Chicago Mercantile Exchange, some farm prices were recently showing a peak in July, but futures contracts change regularly, Ruland said.

Cheese prices are also being affected. Cheddar cheese prices at the Chicago Mercantile Exchange increased 10 cents per pound to $2.10 in the week ending June 22, one of the 10 highest wholesale prices ever, according to the IDFA.

“The activity on the wholesale markets and minimum government-mandated prices for farm milk are very high right now and pushing against historic highs,” Ruland told SN.

“What happens at retail depends on how long these wholesale and farm prices stay high and how manufacturers, marketers and retailers choose to manage the higher input costs.”

Recently, these increases have caused Dean Foods, Starbucks and Hershey's to lower earnings guidance, and have led both Pizza Hut and Papa John's to raise the price of cheese-only pizzas.