Milk and dairy products are back in the stratosphere.

It’s not like we didn’t know it was going to happen. It’s just that most buyers and sellers didn’t do anything about it. But today we have most of the tools to do something.

History repeats itself and its time to learn some lessons. Exactly three years ago, I was talking about “record-shattering wholesale and retail price surges this past spring that drove milk and dairy product sales sharply lower.”

Back in the second quarter of 2004, farm milk prices were 15% to 20% above the previous high. This summer, milk prices bested the old record by another 12% to 15%. Why? Both price surges were preceded by abnormally low prices.

Here’s a sample: During May 2002, the “all milk” price was $12.10; by May 2003 it had sunk to $11.00; however, by May 2004, the “all milk” price stood at $19.30, a new record high. Reverse course: $14.70 by May 2005 and $11.90 by May 2006. Bingo: The “all milk” price had climbed back to $18.00 by May 2007 and hit $21.70 during July (The most recent price available at this writing).

It is the law of supply and demand; it is the market place doing its thing. It’s hundreds of individuals—producers, processors, marketers, end users—making decisions that make economic sense for them. It’s Mother Nature throwing a fit. It’s ethanol. It’s oil prices.

No one is particularly to blame. But everyone in the dairy business takes the brunt of these price cycles.

Each time prices climbed higher, headlines ranted and raved about the huge increase in milk prices at the supermarket. Sticker shock meant plummeting milk sales in the grocery store. Starbuck’s blamed milk for an 11-cent per cup price increase in 2004; a nine-cent increase this year.

Through the first four months of this year, beverage milk sales were chalking up back-to-back, year-over-year sales increases. By May, the welcome trend of improving sales went out the window.

It wasn’t just the headlines that did it. Too many families in this country are living on a budget that can’t readily accommodate sudden food price increases. The Yuppies sipping lattes are one market, and a nice market for milk, but they aren’t buying two, three or four gallons of milk a week to nourish several offspring.

Higher wholesale prices translate into higher retail prices very quickly on the beverage side of the business. It takes a while for higher wholesales prices to get passed through for cheese, butter and other manufactured product, but sales were already slowing by early summer.

I’ve only exposed the tip of the iceberg. Countless other changes in consumer and customer behavior have a long-lasting impact on dairy sales when prices spike. Lower prices don’t necessarily lure former customers back. They’ve reformulated; they’ve switched gears and their milk and dairy product usage has been permanently trimmed.

As marketers, what can we do to help reduce sticker shock? There are a couple of answers: (1) Add value and (2) Forward contract.

Total retail cheese sales fell below year-earlier levels, but sales of value-added products—slices, cubes, strings and sticks—didn’t take a big hit; some actually continued to increase.

Protect yourself and your customers by forward contracting, by using the futures and options markets. Some savvy marketers and dairy product users have been taking advantage of these tools. Now, it looks like new farm legislation will level the playing field and make it possible for everyone, not just cooperatives, to more fully utilize forward contracting.

It’s too late now; the proverbial horse is out of the barn and the price spikes of 2007 will soon be in the history book. But history repeats itself. Protect yourself, your company and your markets. n

For archived Jerry Dryer articles, visit www.dairyfoods.com.