Industry Jump

July 1, 2007
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Industry Jump

Milk prices continue to rise, generating cost increases for other dairy products.

As June Dairy Month gives way to National Ice Cream Month in July, the rising cost of milk is threatening the businesses of ice cream processors this summer.
Just when the idea of rising fuel costs has started settling in the American brain, the thought of paying more for our favorite warm-weather treat may be more than the average consumer can handle. The cost of other dairy food products is being affected as well.
According to Washington, D.C.-based International Dairy Foods Association (IDFA), milk prices worldwide are rising at the fastest rate ever due to growing demand in developing countries and dwindling government supplies — thus creating a competitive dairy market — while processors struggle to keep prices manageable for the average consumer. IDFA says the industry has seen additional increases in farm and wholesale prices in May and June.
On June 1, the government announced a Class I minimum price mover (the mandated minimum base price that milk companies must pay to farmers for milk used in packaged beverage milk products) of $17.84 per hundredweight — 66 percent higher than it was in June 2006. Then, in late June, USDA announced the Class I minimum price mover for July — at $20.91, it is the second highest in history. The record of $21.13 per hundredweight was set in June 2004.
Meanwhile, block cheddar cheese prices at the Chicago Mercantile Exchange (CME) increased 10 cents in a week to close at $2.10 per pound on June 22, one of the 10 highest wholesale prices ever.
Prices for milk and dairy products have risen recently due to a number of factors. IDFA says strong international demand for U.S. dairy ingredients, particularly nonfat dry milk (NFDM), dry whey and lactose is a major contributor. Due to this international demand and short supply worldwide, the component prices for U.S. NFDM and dry whey have been increasing steadily over the past six months. NFDM rose about 30 percent in early 2007 and the price of dry whey hit a record high — more than double it ever was before the current run-up in prices.
Another major factor, says IDFA, is the rising cost of feed for dairy cows, the largest cost dairy farmers incur. Corn prices have been rising in particular due to an increased demand for ethanol created by an interest in alternative fuels. Ethanol production diverts corn from the animal feed supply, as well as land that had been used to grow feed corn. Corn futures market prices suggest the price of corn will remain relatively high this year.
Prices have also risen for soybeans, another feed crop.
Meanwhile, IDFA notes the industry is seeing a steady domestic demand for dairy. Americans continue to enjoy cheese, milk, ice cream and other dairy products, and value their nutritional benefits.
Finally, the lower farm milk prices of 2006 resulted in a slowing of the growth of total U.S. milk production (less milk coming from dairy farms into the supply chain). This, coupled with strong demand both here and abroad, has led to higher prices.

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