Milk Prices Going Up Due to Reduced Supply

Consumers soon can expect to pay 50 cents more for a gallon of milk, due to a combination of smaller herds, higher feed and beef prices, less growth hormone on the market and the emergence of mad cow disease.

Milk prices reached a 25-year low last year but are rebounding to record highs in 2004, helped by a reduction in supply.

“It’s almost a perfect storm of factors, any one of which wouldn’t have much of an impact, but together [they] have kept a heavy lid on production,” said Christopher Galen, a spokesman for the National Milk Producers Federation.

Last year, the group began a voluntary program, Cooperatives Working Together, that was intended to cut supply and raise farmers’ income. The program paid farmers who reduced their milk production, either by milking less or slaughtering herds. It also offered assistance to farmers who wanted to export cheese, thus taking more milk out of the domestic market.

Ed Jesse, a dairy economist with the University of Wisconsin, said the program has had some effect but that other market forces are a larger factor.

“U.S. dairy farmers were killing cows because of lousy milk prices and good beef prices,” he said.

Galen said the 8.9 million dairy cows in the United States represent the lowest number in five years.

“The bottom line is that milk production has not been keeping up with demand,” he said. “Probably the biggest factor is the two-year price depression. That just knocked the wind out of the sails of the dairy sector.”

Other factors include higher feed prices, particularly for soybeans; a reduction in the production of Monsanto’s growth hormone; and the banning of livestock from Canada after one case of mad cow disease was discovered there in May, followed in December by the first U.S. case in a cow imported from Canada. Normally, 50,000 Canadian dairy cows cross the border each year.

The Agriculture Department is predicting that the increased raw milk prices would create a 4% to 6% increase in retail prices for all dairy products this year.

“In the last couple of years, the increase has been 1% to 2% a year, so this is significant,” said Annette Clauson, an economist in the department’s Economic Research Service.

Jesse said by next month, the retail price for a gallon of milk would increase by about 50 cents.

Retail milk prices already had risen by 15 cents a gallon, from a nationwide average of $2.85 on March 1 to $3 by April 1, Jesse said.