CHICAGO (Reuters) - What do milk and gasoline have in common? With milk, as with gasoline, consumers have a hard time turning away even when prices soar.
A year ago, raw milk from farmers cost processors $14-15 per hundred pounds. That cost is now $4-5 higher.
At the big Dominick’s grocery chain in Chicago, a single gallon of whole milk now costs $3.49, well above the national average of $3.38.
One shopper, Cecelia Mandigma, said she had noticed the higher price but will not forgo buying milk, “because I need it.”
Kelly Bramel, a market analyst with Huntington Financial, says milk remains a dietary staple that most cannot do without. “People are not willing to give up milk,” she said.
Higher milk prices might be here to stay, analysts said.
Milk prices are rising for a variety of reasons. Demand for ethanol fuel has not only pushed up corn prices but also milk prices. Cows are fed with corn and as more corn is diverted to energy production, feed costs rise and dairy farmers in turn pass those costs up the food chain.
Corn prices at the Chicago Board of Trade hit 10-year highs in February. On Tuesday, fluid milk futures for July delivery at the Chicago Mercantile Exchange (CME) hit a record high of $21.80 per hundred pounds.
Economists expect the price of milk, as well as processed products like cheese, ice cream, yogurt and butter, to stay on the rise the rest of the year due to strong demand.
“Strong demand for dairy products and limited ability to adjust production in the short term has resulted in significantly higher price forecasts this month,” the U.S. Agriculture Department said in its monthly supply and demand estimates for farm commodities on June 11.
“In 2007, the all-milk price is forecast to average a record $18.55 to $18.95 per cwt, and then decline to $17.90 to $18.90 per cwt in 2008,” the USDA said.
USDA also raised its milk production forecasts for 2007 and 2008, despite higher feed costs. But it said “continued strong demand for dairy products and expected tightness in international supplies” were driving the gains.
Soaring raw milk prices are good news for farmers, but can put the squeeze on processors and retailers who are concerned about soaring retail prices.
Dean Foods Co., the nation’s largest processor and distributor of milk and dairy products, cut its profit forecast last week, citing the soaring cost of raw milk, sending its shares down as much as 5.5 percent.
A study by the California Department of Food and Agriculture last year estimated that for a gallon of whole milk a farmer typically receives about 40 percent of the sales price, with about 30 percent to the processor and distributor and 30 percent to the retailer.
That illustrates how nonfarm costs like labor, fuel and storage easily play a critical role in the price of milk. As diesel costs for milk tanker trucks go up, so do milk prices.
Michael Swanson, an agricultural economist with Wells Fargo, also pointed to global demand. A drought in Australia has increased milk imports. There is also growing global demand for whey, a milk by-product used in energy bars and sports drinks. CME whey futures prices are up 20 percent since being launched on the exchange in March.
A growing demand around the world for dairy products like nonfat dry milk powders as a source of protein has also been a driver, said Mary Keough Ledman, an agricultural economist.
“We take milk for granted. We don’t look at it as a source of cheap protein,” said Ledman, who said that even at $4.50 per gallon, consumers pay only 3.1 cents per gram for milk protein.
“A bargain compared to red meat,” Ledman said.
The consumer reaction to higher dairy prices? “There has been none yet, because they haven’t seen it,” said Ledman, who expects prices to increase significantly in July, potentially taking a gallon of milk that now sells for $3.49 to $4.09.
“These higher prices are here to stay,” she said. “You’re not going to like it at first but I don’t think people are going to stop buying milk.”
Bob Cropp, an agricultural economist at the University of Wisconsin, said that as milk prices rise, people will not stop buying, but they “will buy less of it.”
“Not a big response, but enough to lower sales. People are wrestling with the high price of gasoline as well,” he said.