U.S. milk prices to rise on exports, tight supply

CHICAGO (Reuters) - Prices of milk, cheese, ice cream, and other dairy products will be going up this summer in the United States as more dairy processors pass on their skyrocketing raw milk costs.

Farm-level milk prices will hit new highs in 2007 due to rapidly growing export demand for several milk products, tight global supplies and only modest gains in U.S. milk production.

"We're going to be hitting record milk prices here in the U.S. and that is going to push up all of our dairy prices by the summer," said Ken Bailey, associate professor of agricultural economics Penn State University.

Farm-level milk prices spiked above $20 per hundred pounds in May 2004. The latest surge could challenge that all-time record, economists said.

Some dairy processors expected earnings to be hurt, and industry economists said it was only a matter of time before the higher costs trickle through to the grocery store.

Dean Foods Co. (DF.N), the top U.S. dairy processor and distributor, warned on Thursday that rising raw milk costs could squeeze earnings in coming quarters, sending shares down as much as 9 percent and prompting some analysts to downgrade the stock.

The retail price of a gallon of milk could rise 10 percent or more this year, from around $3.00 a gallon to at least $3.30 a gallon on average, dairy market economists said.

Prices for other dairy products like cheese, yogurt, and ice cream will also rise, but the extent will depend on the amount of milk used in the products, they said.

"Ice cream prices will go up, but I don't think ice cream will go up a lot. Dairy is only maybe 20 percent of the ingredients of ice cream," Bailey said.

GLOBAL DEMAND GROWING

Strong global demand for milk products such as skim milk powder and dry whey is largely behind the surge in prices.

Whey is used in foods such as crackers, breads, pastries and animal feed. More recently, athletes are consuming it in protein bars and sports drinks because it can rebuild muscles and speed recovery after workouts.

"The global demand for protein is very strong. Our competitors are making less of it so everyone is turning to the U.S. for products like skim milk powder, whey protein concentrate, and dry whey," Bailey said.

Dry whey exports nearly doubled over the past two years due to a drop in output in Australia and Europe and favorable U.S. dollar exchange rates. Cash prices have nearly tripled in the past year, according to U.S. Agriculture Department data.

The jump in whey prices alone has added about $3 per cwt to the price of milk, according to Bob Cropp, a dairy marketing economist University of Wisconsin at Madison.

Dairy farm earnings in 2006 were off 15 percent from 2005. That, along with surging feed costs due to the ethanol-driven rally in corn prices, discouraged dairy-herd expansion.

This winter, economists predicted another painful year for producers, but fortunes have since changed.

Production may continue to lag demand as many producers reduced herds ahead of the jump in milk prices and may be slow to increase production, fearing prices could plunge as quickly as they rose.

Corn prices were also expected to remain high, despite projections for the largest crop in history in 2007, as the booming ethanol industry consumes more of the grain.

Chicago Mercantile Exchange milk futures were up more than 70 percent from a year ago while CME cash cheese prices were up about 45 percent. Dry whey futures have risen almost 20 percent since being launched in mid-March.