Researcher Projects Rising Milk Costs by October

UNIVERSITY PARK – Consumers could see sharply higher prices for milk and other dairy products over the next six months, according to a milk-marketing expert in Penn State’s College of Agricultural Sciences.

Ken Bailey, an associate professor of agricultural economics who specializes in dairy policy and price analysis, projects the average retail price of whole milk to rise from January’s nearly $3.07 per gallon in to about $3.35 by October 2007. Consumers’ costs for butter, yogurt, ice cream and cheese also will rise.

Bailey cites a combination of global milk markets and the growing demand for ethanol as the catalyst for the increase.

“International demand for milk protein is very high, and global supplies are limited,” Bailey says. “Also, a strong export demand for dry proteins — skim milk powder, dry whey and whey protein concentrates — is leaving very low inventories for nonfat dry milk and dry whey. The result is that domestic supplies of these milk protein products are limited and global market prices are rising. That feeds back to the farm price of milk.

“Corn and soybean prices continue to rise in futures trading, and these higher feed prices are squeezing milk-producer margins and aggravating existing poor cash-flow conditions,” he says. “We were expecting cow numbers to rise a few more months and then begin a decline in response to lower prices from 2006. But the recently announced Cooperatives Working Together program could cull an additional 50,000 to 64,000 head of dairy cows, so we can expect a noticeable reduction in cow numbers starting in March. In addition, poor cash flow and rising feed prices, coupled with market pressures to use less production-boosting rBST hormone, will noticeably lower milk yields during the first quarter of 2007.”

Also, he says, dairy cow feed costs — particularly corn and soybean meal prices — are rising rapidly as a result of increasing demand for these feedstocks for ethanol production.

“Since feed represents half the cost of producing milk, farmers are getting squeezed financially, even though milk prices are rising,” he says. “In fact, there was evidence already in January and February that farmers cut back on milk production. Less milk means higher prices in the grocery store.

“Consumers can also expect to pay higher prices for dairy staples such as cheese, butter, yogurt and ice cream, as well as for many food items that depend on dairy products such as candy bars, bakery goods and sports and nutrition bars.”

Bailey points out that wide dairy-price fluctuations aren’t unusual: retail milk prices fell in 2006 from almost $3.20 per gallon in January to a low of about $2.98 in November in response to low farm prices. The average price received by U.S. farmers fell from $14.50 per 100 pounds (about 11 gallons) in January 2006 to a low of $11.80 in July before recovering to $14.10 by December.

“Normally, retail milk prices rise very quickly when farm milk prices rise, but decline slowly when farmers face lower prices,” he says. “Farm milk prices — the price processors pay to farmers for their milk — are expected to rise significantly in 2007. The average farm price of milk is forecast to rise from $14.50 per 100 pounds in January 2007 to a peak of $16.62 in August. Since processors are expected to pay more for milk, the retail price will also rise.”

More information on the complicated milk-marketing process — including a video presentation explaining milk-price projections — is available on Bailey’s Dairy Outlook Web site at http://dairyoutlook.aers.psu.edu/ online.

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