Got Milk ... Money? It's Not Cheap; U.S. Dairy Industry Under Pressure

Published June 12, 2007

| FoxNews.com

Got milk money? Move over pains at the pump, milk prices are hitting record highs and still climbing, and on the way up hitting consumers in the pocketbook.

"It's cheaper to cook breakfast for children. Cereal and milk could cost $10," said Food Mart manager Tracy Duke. Last week the Alabama store had milk for $4.39 a gallon.

"It's probably not going to stop with milk. As gas has gone up everything else has gone up as well," said Air Force Lt. Col. Jim Jovene. He and his wife, Karen, have six children, ages 4-17.

"My kids just drink a ton of milk," he said. They purchase about 10 gallons a week, he said, paying $2.40 at the military commissary, but $3.67 at a Winn-Dixie grocery.

Drought, high fuel and feed prices, a surge in international sales and the cost of dairy operations are factors boosting milk prices to record levels.

In Alabama, the price for a gallon of milk has already broken a 2004 record of $3.57 a gallon. Agriculture economists say it could hit $4.50 this summer.

"You could say it has been cheap all this time and now just starting to catch up with cost," said Auburn University dairy expert Boyd Brady.

Lower farm milk prices last year resulted in a slowing of the growth of total milk production in the U.S., with less milk coming from dairy farms into the supply chain.

The current surge in milk prices has consumers, who already struggle with higher gasoline prices, concerned about a grocery budget-buster.

Louella Johnson said she has 21 grandchildren and some of them "drink milk all day long." But she said there's nothing she can do about the price.

"Rent, lights, gas, power. It's outrageous," she said in a cost-of-living litany.

University of Missouri-Columbia agriculture economist Scott Brown said the price could reach $4.50 in August before dropping later in the year to around $3.50. The previous record came in June 2004 at $3.57 per gallon, he said.

"The number one factor driving milk prices higher is international demand for dairy products like nonfat dry milk and whey products," Brown said. "Our pricing system here in the U.S. results in all milk prices moving higher."

Mississippi State University agriculture economist Dr. Bill Herndon said U.S. dairy sales to China and India are growing. He said the U.S. is taking up the slack caused by a dairy export decline from drought-hit Australia and New Zealand's inability to expand its production.

Also, dairy labor costs - amid a crackdown on immigrant workers - influence the milk price.

"It's hard to find people willing to work 365 days a year," Brady said in a telephone interview Thursday.

Dairy operations in the Southeast have declined in number as milk to meet the shortfall in supply arrives from states with industrial-size dairies in the West and North.

With the lingering drought and record high corn prices, driven up by the ethanol craze, Brady said feed costs have climbed. Feed is the largest operational cost for dairy farmers.

Corn futures market prices indicate that the price of corn will remain relatively high this year, and prices have also risen for soybeans, another feed crop, according to the International Dairy Foods Association.

"Don't even think about the drought and what it's doing," said Brady, warning of the drought's long-term effects for farmers.

Brady said the dairy farmer doesn't set the price of milk and it's a product that can't be held off the market for long. Only about 75 licensed dairies operate in Alabama. Mississippi has about 190; Georgia 300; Florida 160; and Louisiana 250.

The U.S. Department of Agriculture forecasts that milk production for the remainder of this year will grow by about 1.2 percent, but USDA expects demand growth to far outstrip this increase.

International demand focuses on dairy items such as dry milk, whey products, cheese and butter which ultimately affect the cost of milk.

U.S. Dairy Industry Under Pressure as Milk Prices Spike

Dean Foods Co., the nation's largest processor and distributor of milk and dairy products, cut its profit forecast on Tuesday due to soaring costs for raw milk, sending its shares down as much as 5.5 percent.

Raw milk prices are increasingly likely to reach all-time highs by the third quarter, which will be "particularly challenging," Dean said in a statement.

Arun Daniel, an analyst at ING Investment Management, said it could take some time for raw milk prices to moderate, noting higher grain prices that drive up the cost of feeding dairy cows, and increasing demand from emerging markets.

The increasing use of corn to produce ethanol is helping to drive up corn prices.

"You have higher corn prices. That is just a fact. That is not going anywhere," Daniel said. "The demand from emerging markets isn't going away any time soon."

Dean said it now expects to earn 30 cents to 31 cents per share, before special items, in the second quarter, down from a previous forecast of 37 cents to 38 cents. For the full year, it expects $1.52 to $1.58 per share, down from a prior estimate of $1.72 to $1.78.

Analysts' average forecasts were 37 cents a share for the second quarter and $1.69 for the full year, according to Reuters Estimates.

"Though we expected a haircut, we did not envision earnings dropping this low," Bear Stearns analyst Terry Bivens said in a research note. Bivens rates Dean shares "outperform."

Higher milk costs are leading to increased prices for dairy products, including cheese and ice cream.

Dean said its Horizon Organic brand is facing increased competition in the organic milk market because of an oversupply of raw organic milk. A change in regulations has encouraged more farmers to produce raw organic milk, forcing prices lower, it said.

Until recently, the U.S. organic milk market was characterized by shortages as consumer demand outstripped supply.

Dean said it would spend aggressively to promote the Horizon brand to maintain market share.

Sales at WhiteWave Foods, through which Dean sells its organic and soy milk products, grew 7 percent during the first quarter and is one of the company's focus areas for growth.

In 2006, WhiteWave accounted for $1.28 billion of Dean's total sales of $10.1 billion.

Dean Foods CEO Gregg Engles has said he expects a 40 percent increase in the supply of organic milk in 2007, creating 25 million excess gallons.

However, Dean said the oversupply situation is short term.

The Associated Press and Reuters contributed to this report.

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