Global Demand for Dairy Ingredients and Record High Feed Prices Drive Milk Prices to All-Time Highs

12/04/07 Strong international demand for U.S. dairy ingredients, coupled with climbing corn and soybean prices, has caused milk prices to reach record highs recently, according to the International Dairy Foods Association (IDFA).

"Strong international demand and short global supply of nonfat dry milk, dry whey and lactose have steadily driven prices up in the past six months," said IDFA President and CEO Connie Tipton. "The price of nonfat dry milk has gone up about 30%, and the price of dry whey is at a record high; in fact, it's more than twice as high as it ever was before the current run-up in prices."

Nonfat dry milk and dry whey prices are "component prices" used by the U.S. government to determine the minimum, government-regulated price that milk and dairy companies must pay for all farm milk within the Federal Milk Marketing Order system. As a result, when prices rise for these dairy ingredients, all farm milk prices increase.

At the same time, growing demand for corn to produce ethanol is causing feed costs to escalate. Feed is the largest operational cost for dairy farmers.

"Ethanol production is diverting some of the available corn formerly used to feed dairy cows, and some farmers are diverting land that had been used to produce other feed crops to grow more corn instead," Tipton explained.

These feed costs are not expected to drop anytime soon. Corn future's market prices are indicating that the price of corn will remain relatively high this year, and prices have also risen for soybeans, another feed crop.

Finally, the lower farm milk prices of 2006 resulted in a slowing of the growth of total milk production in the United States, with less milk coming from dairy farms into the supply chain. Lower production, coupled with strong demand both here and abroad, has contributed to the higher prices.

And that demand shows no signs of abating. Dr. Bob Cropp, professor emeritus at the University of Wisconsin-Madison, predicts in his March 2007 Dairy Situation and Outlook report that "the milk supply/demand situation will become increasingly tight and will support higher milk prices in the months ahead."

Global market demand is expected to continue as well. Fonterra, a major multinational dairy company based in New Zealand, recently issued its most optimistic forecast ever, estimating that global demand for dairy products will grow 2.7% annually during the next 10 years.

"It's really encouraging that the U.S. is now a major player in the growing global market for dairy products, but it's also a mixed blessing for our industry because of substantially higher input costs," Tipton concluded.