Milk prices skyrocketing – why?

The price of a gallon of milk is one number that anyone who does family grocery shopping regularly knows well. For a very long time, I’ve been paying $1.99 for the cheapest gallon of skim milk at Fred Meyer. Then a couple of months ago, it moved to $2.50, and this weekend I paid $2.99. A 50% rise in just a few months is significant, so I set out to research possible causes.

From the San Francisco Chronicle:

“The price spike — the result of a drought in Australia, tightening supplies from Europe, higher demand in Asia and the diversion of feed corn to ethanol plants — also threatens to jack up the cost of cheese, lattes, chocolate bars and pizzas.”

“The demand for milk protein is surging, particularly in China, India, Indonesia and other nations with developing economies, said Bill Van Dam, chief executive of the Alliance of Western Milk Producers, a trade association of producers in Sacramento. Supplies are tightening because of a yearlong drought in Australia, typically a major dairy exporter. In addition, there is a cap on dairy subsidies in the European Union, dramatically reducing what is typically a bountiful supply, he added.

Meantime, the price of corn, which dairy operators use to supplement forage for their cattle feed, has more than doubled amid a construction boom in ethanol plants.

“Biofuels are going to rip the ears off the food industry” as corn goes not for food but for fuel, said Jim Boyce, the president of Marin French Cheese Co. in Petaluma.”

Many other of the first page hits for my Google search of “price of milk 2007” cite ethanol production as a causative factor. The Baltimore Sun agrees that ethanol production is affecting milk prices. It also notes that milk prices vary regionally, due to the expense of transporting a heavy liquid. People in New Orleans are paying $4.09 per gallon, those in Dallas $2.76

The Chronicle article says increasing exports are also raising prices at home. Also, that prices were artificially low in 2006, so some of what we’re seeing is a necessary correction, coupled with milk prices normally rising over the summer. And it references pricing regulations in California that require the State posts the “lowest reported lawful retail price” for milk, due to a law prohibiting selling milk below cost. I’m not easily finding related regulations here in Oregon – can anyone tell me if we have laws governing dairy prices in this state?

And why does this matter to you, even if you’re not much of a milk drinker?

“In Seattle, a spokeswoman for Starbucks Coffee Co. said that dairy represents from 5 percent to 10 percent of the company’s costs, “and as such will put pressure on our cost structure in fiscal 2007.”

Now, are you concerned?

One positive note: CNN Money reports that the cost of organic milk is decreasing and in many places becoming competitive in price. “Organic prices have stabilized and in some cases dropped due to what experts call a one-year glut in production caused by farmers taking advantage of a regulatory grace period regarding feed requirements”, it says. “The Department of Agriculture [is] giving farmers one last year to feed cows 80 percent organic feed and 20 percent conventional to be certified as organic. Starting next year, farms will have to go 100 percent organic. That extra year provides farmers a substantial savings, leading many to join the organic bandwagon this year in hopes of cashing in.”