Wellington: Milk prices worldwide are rising at the fastest rate ever and won’t be falling anytime soon due to rising demand in China and Latin America and dwindling government supplies.
Dairy farmers have failed to keep pace with a 3% increase in annual milk consumption, according to the Netherlands’ Rabobank Groep, the world’s biggest agricultural lender. Reduced subsidies eliminated milk surpluses in Europe and slowed production growth in the US, government data show.
The rally in prices started last year after Australia reduced exports because of its worst drought in a century.
“Over the next several months we’re going to see some pretty strong prices on all milk,” said Larry Salathe, an economist and dairy expert at the US Department of Agriculture (USDA) in Washington. Production needed to bring prices down “takes at least several months, usually a year to two years, to come.”
Skim-milk powder, the benchmark for world trade, has risen 60% in six months to a record $1.58 (Rs64.78) a pound (0.45kg) on 4 May on the Chicago Mercantile Exchange, seven times higher than the five-year average. In the first five months last year, prices fell 14%. Fluid milk futures advanced to a record $19.15 on 3 May and have risen 63% in the past year.
Hershey Co., the biggest US candy maker, and Dean Foods Co., America’s largest milk processor, said this month that higher dairy costs will hinder profit growth. Domino’s Pizza Inc. said it will spend more on cheese, which accounts for 30% of the cost of each pizza.
Runaway prices: The fastest-ever rally in milk prices is due to reduced exports from Australia at a time when annual consumption has gone up by 3%, and a 55% hike in the cost of corn, the main source of livestock feed.
Government officials say food programmes for children in India, Indonesia, Mexico, the Philippines and Algeria may be scaled back because of the rising costs. About 80% of the world’s exported milk powder is sold to developing countries.
Raghuveera Reddy, agriculture minister for Andhra Pradesh, which has more than 75 million people, said rising milk costs “will have an impact” on the country’s consumers.
This year’s rally is different from increases in previous years because government surpluses are no longer available in dairy-producing countries such as the US, the largest exporter of milk powder, and the European Union (EU), the largest exporter of cheese.
US inventories of butter, cheese and dry milk peaked at more than 1.2 million tonnes in 1983. The government that year spent $2.5 billion on surplus dairy products to support prices and farmer income. Today, the US has no surplus after selling the approximately 12,200 tonnes it held in 2005, USDA data show. European warehouses, which had 200,000 tonnes of milk powder in 2003, are empty, says Erhard Richarts, dairy expert with the Bonn-based market and price reporting agency ZMP. Skim milk powder exports from Europe fell to 84,000 tonnes last year from 194,000 tonnes in 2005, he said.
The EU had said in March that only “residual quantities” of butter are left in member countries after a sale of some 6,000 tonnes that month.
The world consumes about 1.9 billion litres of milk a day, enough to fill five supertankers, based on estimates by Rabobank. The 14% jump in milk demand during the past seven years outpaced the 13% rise in oil use, according to estimates from the International Energy Agency in Paris.
The annual increase in consumption since 2001 was 13 billion litres of milk on average, or about what is produced each year by New Zealand. Milk exports have helped make New Zealand’s currency the best performer against the dollar in the past year among the 16 most-active markets. Uruguay and the Netherlands also are benefiting from dairy sales.
While the 2.5 billion people in China and India are drinking more milk than ever, they still have a long way to go before catching up with the US. Per-capita demand in the US, buoyed by the “Got Milk” promotions begun in 1993 by the California Milk Advisory Board, averages 25 ounces (709g) a day, almost four times the amount in India and 19 times more than in China.
Chinese consumers, who drink an average of 1.3 ounces of milk a day, will increase demand by as much as 15% annually for the next three years, said Mark Voorbergen, a dairy analyst at Rabobank. India’s gains will range from 3% for milk to 7% for processed dairy products, he said.
Rising milk prices have increased interest among investors. Tod McElroy, who helps manage $2 billion at Hunter Hall International Ltd in Sydney, is spending $20 million to make dairies out of cattle ranches in Uruguay.
“The supply is coming under pressure cost-wise, and then you’ve got this big increase in demand,” he said.
Milk production also may drop because the cost of corn, the main source of livestock feed, has advanced 55% in the past year to $3.6925 a bushel (35.24 cubic decimeters) on the Chicago Board of Trade. Rising demand for grain-based ethanol has pushed up corn feed price and may prevent dairy farmers from expanding their cow herds, say analysts. “Producers are still a little scared of the high feed costs,” said Joel Karlin, commodity sales coordinator for Western Milling in Goshen, California.
Feed accounts for half the cost of producing 100 pounds of milk in the US. The value of a pound of milk was equal to 2.54 pounds of dairy feed in April, up from 2.48 a year earlier, the USDA said. The ratio needs to be at three pounds for several months before milk producers will expand herds, Karlin said.
Milk output in the top 20 producing countries rose 1.7% to an estimated 425.1 million tonnes in 2006, while consumption of fluid milk rose 1.9% to 170.4 million, the USDA estimated in December. Output was forecast to rise 2.1% to 434 million tonnes as consumption may gain 3.1% to 175.7 million, USDA said.
“It’s a straight supply-demand equation,” said Craig Norgate, who used to run Auckland-based Fonterra Cooperative Group, the world’s largest dairy exporter. “The population is in Asia and Africa, and the places that can supply the food aren’t.”
“Milk prices should actually go higher before settling down,” Prudential Equity Group analyst John McMillin said in a 3 May report.
Domino’s Pizza has already budgeted for higher prices this year for cheese. “We are horrible at predicting cheese prices and we are not going to start,” chairman David Brandon said on a 2 May conference call, when asked for his outlook.
Hershey lowered its annual profit forecast on 10 May because of rising prices for the milk used in chocolate, saying growth may be as low as 4%, less than half an earlier projection. Switzerland-based Nestle SA said last month it will raise prices of some dairy products by more than 10% this year because of higher milk costs.
Milk prices at US stores averaged $3.32 a gallon (3.8 litres) in April, up 2.9% from a year earlier, USDA data show. Retail costs may go higher, after the government last week raised its month-old forecasts for record wholesale prices. Retail milk prices in the UK rose 15% in the past year to £2.30 (Rs186.30) in April for a gallon, according to the UK Dairy Association. Prices on the farm will jump 34% this year to a record $17.30 per 100 pounds on average from $12.90 in 2006, up from a $15.80 forecast in April, the USDA said. The previous record was $16.13 in 2004. Milk will rise next year to $17.50, the agency said in its first forecast for 2008.
Farmers are also earning less as retailers seek to limit price hikes. In the UK, some 3,000 of its 18,000 dairy producers may leave the industry in the next two years, according to the Royal Association of British Dairy Farmers and the National Farmers Union.
Even producers have been caught off guard by the market’s strength.
“Prices are probably at their peak now,” said Henry van der Heyden, chairman of Fonterra in New Zealand. “But if you’d asked me that 10 months ago, I would have probably said the same.”