Bloomberg News

Milk Seen Surging 15% on Drought-Feed Costs Before Demand Slows

October 16, 2012

Retail-milk prices will rise as much as 15 percent by the first quarter of 2013 after the worst U.S. drought since 1956 sent livestock-feed costs to a record, according to Dairy Management Inc., an industry group.

“Since the drought started, the milk price has gone up quite a bit,” Dairy Management Chief Executive Officer Tom Gallagher said yesterday during an interview in Chicago. “Prices are going to go up worldwide.”

The drought led to the biggest U.S. drop in corn production in 17 years, sending the price of the main feed ingredient for dairies to an all-time high on Aug. 10 of $8.49 a bushel. Prices are up 47 percent since mid-June, forcing some California dairies into bankruptcy, while others cut their herds and output to limit losses. Milk futures in Chicago touched $21.26 per 100 pounds on Oct. 3, a 13-month high.

“When you get to $25 milk, if that happens, the effect on the retail price is enormous,” Gallagher said. Consumers paid on average $3.469 a gallon in September, U.S. Bureau of Labor Statistics data show.

Milk futures through yesterday were up 36 percent since mid-June on the Chicago Mercantile Exchange and may advance to a record $25 by June, according to Shawn Hackett, the president of Boynton Beach, Florida-based Hackett Financial Advisers Inc., who in March correctly forecast prices would rally.

Dairy Management, a marketer based in Rosemont, Illinois, receives 15 cents on every 100 pounds of milk produced in the U.S. to promote dairy products domestically and overseas. The organization includes the American Dairy Association, National Dairy Council and U.S. Dairy Export Council.

Demand Slowdown

After the price increases expected early next year, further gains may slow because producers probably will boost output and consumption will drop, Gallagher said. For every 10 percent increase in cost at the grocery store, consumption falls by about 4 percent, he said.

Low-income families in the U.S. and people in developing nations will be hardest hit, Gallagher said. The U.S. exports about 14 percent of dairy products, with Mexico being the largest buyer, he said. Retail-food prices are forecast by the U.S. Department of Agriculture to rise 2.5 percent to 3.5 percent this year. Globally, food costs have gained in two of the past three months, United Nations data show.

“We know that it will really hurt sales,” Gallagher said. “Food insecurity, particularly in the poorer countries, that’s a big deal. There’s a fair amount of supply worldwide, but you’re still going to have people hurt in different countries.”

To contact the reporters on this story: Tony C. Dreibus in Chicago at tdreibus@bloomberg.net, or Elizabeth Campbell in Chicago at ecampbell14@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net


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