Cost of milk on track for a record this year

Demand for ethanol pushes up price of corn for feeding cows

June 26, 2007|By Stephanie Newton | Stephanie Newton,SUN REPORTER

Add milk to the list of products that consumers are paying more for this summer as analysts predict that prices will reach record highs during the next few months - fallout from the rising price of oil.

The rising prices are pressuring profits at several companies that sell dairy products, including pizza, yogurt and ice cream makers. Domino's Pizza Inc., for example, said it could be forced to raise its prices due in part to higher cheese costs.

Nationally, the average cost of a gallon of whole milk rose 19 cents during the past two months, to $3.26 in May, according to the U.S. Department of Labor. In Baltimore, the May average was $3.42 - up from $3.16 in March, according to the U.S. Department of Agriculture. Higher prices have continued this month: One area supermarket priced a gallon of whole milk at $3.99 yesterday.

The rising cost for corn, which dairy cows eat, because of ethanol demand is the biggest driver of higher milk prices this year, dairy analysts said. High oil costs have pushed up the price of gasoline and other energy sources during recent years. That in turn has sparked the growth of ethanol as an alternative fuel. Corn growers are working to fill the demand since the price for that crop has risen.

Larry Salathe, a senior economist with the USDA, estimates that U.S. milk shoppers could be paying 26 cents more per gallon during the next month. That would be near the U.S. average peak price of $3.57 a gallon set in June 2004. Salathe's prediction, based on milk data newly released by the federal government last week, would be an increase of 82 cents per gallon compared with 12 months ago.

Dairy prices typically rise this time of year anyway. But the combination of pricier corn feed for cows, rising oil costs, international demand and a drought in Australia could make it one of the worst seasons for milk prices, commodity analysts said.

The price jump frustrates Lanny Dowell of Hunt Valley, a mother of three who says she has no choice but to pay the higher costs. And she said higher prices for gasoline and electricity this summer already are stretching her family's budget.

"It's ridiculous," she said while shopping in the Giant Food on York Road in Towson. "We probably go through a gallon of milk a day."

Sheldon Garvida, an analyst of the dairy cattle and milk production market with the U.S. Bureau of Labor Statistics, said farmers are decreasing their herd sizes because of rising feed costs. He said the move to produce more ethanol is pushing up the price of corn and forcing dairy farmers to pass along the added cost to customers.

"That's something that hasn't been a focus in past years," Garvida said.

James Vona, president of Frederick-based Dairy Maid Dairy Inc., said the 26 percent increase he has seen in raw milk since January is directly related to ethanol use.

Corn prices are predicted to reach $4.04 a bushel by December, the USDA reports. The price per bushel was $3.74 in May and $3.03 in October.

There are other factors pushing up prices as well.

Internationally, there have been major losses to grain crops in Australia, Russia, Ukraine and parts of the European Union because of hot, dry conditions. Any unexpected demand for milk over the next two to three months from a large consumer, such as India or China, would be "very explosive" to the dairy farmers of those nations, according to reports filed by Dairy Australia, a Melbourne operation that monitors the continent's dairy industry.

Because Australia is one of the United States' biggest competitors on exports and the value of the dollar has fallen versus other foreign currencies, international concerns are greater than they have been in past years, Garvida said.

In the United States, New Orleans recorded the highest price for a gallon of whole milk in May at $4.09, according to a USDA study of 30 cities. Chicago had the second-highest price in May at $3.86. Dallas was the lowest with $2.76 a gallon.

Howard Leathers, an associate professor of agricultural and resource economics at the University of Maryland, College Park, said the difference in regional prices typically comes from the transportation costs. Milk is costly to transport, he said, because it's so heavy, and higher oil costs have pushed up costs.

Some local dairy farmers said the recent price spike could help them, given that many of those operations grow their own corn. But they added that such economic benefits never last and they expect prices to retreat sooner or later.

"It's hard to say in the dairy industry," said Kate Dallam, owner of Broom's Bloom Dairy in Bel Air. "There are peaks and valleys in the way dairy farmers are paid, and we know it will all come down eventually."

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