What Goes Up, Stays Up?

Dairy Field, Jun 2004

Price increases continue in the dairy case.

Consumers are continuing to see record increases in milk prices due to the U.S. Department of Agriculture's (USDA) decision to raise the minimum price paid to farmers to $1.69 per gallon.

In April, the USDA announced a base price of $19.65 per hundredweight for farm milk used in Class I products in the federal orders for May; the April price was $13.64. The $6.01 price difference translates to more than 51 cents per gallon of farm milk with 3.5 percent butterfat.

The higher May price, according to the International Dairy Foods Association (IDFA), was driven by increases in wholesale prices for manufactured dairy products, primarily cheddar cheese and butter. Dairy product prices have jumped 10.4 percent in April, the biggest monthly rise since july 1946. Milk more than doubled in the past year to a record $19.65 per 100 pounds after the U.S. cow herd shrank, reducing production valued at $21.4 billion last year, government figures show. In fact, retail prices for a gallon of milk have risen as much as 25 percent in some areas.

According to the National Ice Cream Retailers Association, ice cream prices are increasing as well. Blamed are heightened prices for ice cream's essential ingredients such as butter, milk, vanilla and chocolate, the association says. When all is said and done, the average cost for the frozen treat is projected to increase 20 to 30 percent.

Many processors are responding to this crisis by raising the cost of their products. For instance, Le Mars, Iowa-based Wells' Dairy Inc. says it has increased its milk prices. Although the company has not had to raise the cost of its well-known Blue Bunny ice cream products, many others have in order to stay afloat. Mega-company Dean Foods says the unprecedented surge in the cost of raw milk and butterfat contributed to its lower first-quarter profit margin.

The effects of higher dairy costs are even trickling down to restaurant chains. For instance, St. Louis-based Panera Bread Co. and Louisville, Ky.-based pizza maker Papa John's International Inc. are among many U.S. food-service companies facing an erosion of profits due to the surge in the cost of milk and other dairy products.