Milk Prices Likely to Rise Along With Energy Costs

California consumers could soon feel another economic pinch from the ongoing energy crisis: higher milk prices.

Dairy processors, some of the state’s biggest natural gas users, have seen their bills increase up to tenfold recently, as surging demand and low inventories have forced them to pay the highest gas prices in the nation. Now they’re set to pass on some of those costs to consumers.

“Sooner or later it’s got to work its way through the system,” says Jane Kleinkramer, director of planning and business development for Land O’Lakes in Tulare.

Milk prices were already set to rise in January, as the state-ordered minimum price paid to farmers increased 15 cents a gallon, an increase usually passed along by retailers. Now analysts say milk prices will get an extra boost. Although no one can say exactly how much, most predict the increase will be less than $1 a gallon.

Milk prices have been inching up in the last two months, reaching a retail average of $2.72 a gallon in October, according to the California Department of Food and Agriculture. The price bumps could put milk above the $3 mark, a point at which consumers would begin to take notice, officials say. But prices should dip in February, they said, as demand for dairy products cools.

Dairy products so far are the only farm commodities in California expected to be affected by the gas spikes because of the enormous amount of energy used in milk processing. Dairies use natural gas-powered equipment to evaporate, dry and pasteurize milk and to take the butterfat out of lower-fat milk and fortify it.

Last year, when natural gas was selling for less than $3 per million British thermal units, the average dairy was spending about $90,000 a month on its gas bill, according to Jim Gomes, president of California Dairies Inc. one of the state’s large cooperatives. Now, that same dairy is spending an average of $900,000.

Denver-based cheese maker Leprino Foods Co., which makes mozzarella in two California plants, has seen its gas costs rise about $20,000 per day, as the contract prices it pays quadrupled to “the low teens” per million BTUs.

California Dairies gambled that the market would cool after its monthly bill almost doubled in the first nine months of the year. It passed up a chance to lock in a long-term contract, which proved a costly miscalculation when rates continued to soar. The big cooperative’s December bill for all five California plants is expected to reach $2.3 million, double the price in October. In January, it’s expected to double again to $4.6 million, a company executive said.

“If these prices are sustained . . . it’s going to put us in financial jeopardy,” Gomes says.

Demand for natural gas in the Golden State has risen an estimated 36% this year, energy analysts say, outstripping supply and sending prices surging. That’s hit big gas users like dairies hard. Typically, gas bills make up about 15% of their total operating costs.

But even with their costs soaring, the state’s large dairy cooperatives can’t idle or slow production like some other manufacturers. Contracts with farmers require them to take the truckloads of milk, which arrive daily.

The state’s cheese makers are the hardest hit because they can’t pass along their higher energy costs in the form of higher prices, as fluid milk processors can. Cheese makers are competing in the national market with dairies from other states, where the energy costs are much lower.

Leprino and other dairy officials have joined with San Diego Gas & Electric in asking the Federal Energy Regulatory Commission to cap the transportation fees that gas marketers charge.

Nationwide, natural gas prices have surged because of winter storms and heavy demand from electric power generators.

But California, which imports most of its gas, has suffered disproportionately. Reduced capacity in one of the four major pipelines serving the state has helped push up transportation fees to exorbitant levels, dairies complain.

“This has hurt our profitability substantially and we will be looking at ways to address the problem,” says Mike Reidy, Leprino’s vice president of administration. Gomes said a group of dairy processors is mulling litigation against a pipeline and its marketing affiliate.

But for now, economists say, consumers will be forced to pitch in. “If the entire industry cost structure has changed . . . you do have the components in place for higher prices,” said Bill Shiek, an economist with the Dairy Institute, a trade group in Sacramento.

State agriculture officials contend that big dairies appear to be using energy costs as an excuse to raise milk prices to make up for the high cost of processing their other products.

“The [energy] costs there might be just a fraction of that used to produce dry milk powder or cheese,” says Kelly Krug, marketing director for the state Department of Food and Agriculture.

Times staff writer Marla Dickerson contributed to this report.

* POWER PRICES

Consumers must pay more for electricity soon, Gov. Gray Davis warns. A1