Saturday, July 21, 2007

Land of milk and money

The first decade of the 21st century may best remembered as the time when gasoline and milk prices both shot above $4.00 per gallon. Speed-of-light financial transactions forces us to consider our actions within the context of a dynamic socioeconomic continuum. The degrees of separation between the cost of milk and gasoline continue to shrink at an alarming rate. The interactions between these market developments across space and time are more intimately and rapidly realized than ever before.

It is more important than ever that we take as comprehensive approach to energy planning and development as possible so that the consequences of our decisions can be taken into consideration.

All options are not created equal. (GW)

Milking the wallet

By Bruce Mohl
Boston Globe
July 15, 2007

Boston milk prices soared to their highest level ever this month as tightening national and world markets for dairy products pushed up the cost of cheese, yogurt, ice cream, chocolate, and even pizza.

Futures markets indicate there may be some softening of prices in the last half of the year, but many analysts say strong international demand for US dairy products and slow growth in US milk production are likely to keep prices rising.

"I don't think we're at the peak yet," said Mike Suever , senior vice president of research and development, engineering, and procurement at H.P. Hood Inc. in Chelsea. "We're in for additional increases into August, September, and maybe October."

The timing is something of a cruel joke for Massachusetts consumers. Even as dairy prices hit record levels, the state is preparing to send emergency relief checks totaling $3.6 million to about 180 Massachusetts dairy farmers.

Officials in the Patrick administration say the relief checks will help dairy farmers who suffered through one of their worst years last year. But that's little consolation to consumers who are facing sticker shock now at the dairy case.

Stop & Shop Supermarkets Inc., the region's largest supermarket chain, posted notices in its stores last week saying "you may have heard that milk prices worldwide are rising at the fastest rates ever" and warning that "prices for milk and other dairy products will be higher for the foreseeable future."

A monthly survey by the US Department of Agriculture indicates the average price of a gallon of whole milk in Boston is currently $3.90, its highest level ever. The survey is based on prices at one store from each of the two leading supermarket chains and one store at the leading convenience store chain. The price is up 25 cents from a month ago and 92 cents over the past year.

Prices were even higher at the Stop & Shop and Shaw's supermarkets on Morrissey Boulevard in Dorchester last week. Both were selling a gallon of store-brand whole milk for $4.29, up $1.10, or 34 percent, from a year ago. A gallon of H.P. Hood milk was just a penny shy of $5.

Prices for ice cream, yogurt, cheese, and other dairy products have been rising more slowly, but industry officials say bigger increases are coming.

The impact is being felt well beyond the supermarket shelf. The Hershey Co., the nation's largest candy maker, and Dean Foods Co., the largest milk processor, have both revised their earnings forecasts downward because of the run-up in dairy prices. Domino's Pizza says its margins are being squeezed because cheese accounts for about a third of the cost of a pizza.

"Ultimately, if the price of cheese and other cost items continues to rise without eventually falling, we -- and all other consumer companies -- would have to raise our prices," said Lynn Liddle , a spokeswoman for Domino's.

Many companies already have raised prices. Kraft Foods Inc., Nestle SA, and Hershey have raised prices of some dairy-based products. Dennis Lane , the owner of a 7-Eleven in Quincy, said his price for a 1.55-ounce Hershey chocolate candy bar has risen to 89 cents from 80 cents over the last year because of manufacturing price hikes.

Vince Petryk , the founder of J.P. Licks in Jamaica Plain, said he is charging 10 percent more for cones this summer, with a small cone selling for $3.60. Petryk said the cost of the mix he uses to make his ice cream has increased 35 percent since last summer.

Consumers interviewed at area supermarkets last week were aware dairy prices were rising, but not overly concerned. Eve Wentzell , picking up a half-gallon of milk at the Stop & Shop in Quincy, said she tries to buy what's on sale and occasionally goes out of her way to buy milk at convenience stores that use low-priced milk as a traffic generator.

Milk prices often go on roller-coaster rides, but some analysts see this year's wild ride upward lasting longer than usual. The US Department of Agriculture is forecasting that prices for milk, butter, and cheese will remain high this year and at least a good portion of next year.

Milk production in the United States tapered off last year when dairy farmers received less money for their milk and their production costs -- primarily feed and energy -- soared. Production still hasn't recovered, but demand has remained high.

Asian countries are also buying large amounts of US nonfat dry milk and whey, which, given the value of the US dollar, are relatively inexpensive sources of protein compared to poultry and fish. Australia and New Zealand would normally supply these products, but both countries are suffering from a severe drought.

Nonfat dry milk, whey, butter, and cheese are the four component products used by federal regulators in setting the price farmers receive for their raw milk. With prices of all four products soaring, that farm price has risen dramatically. It hit $2.08 a gallon this month in Boston, up 82 cents from a year ago and just shy of the all-time peak of $2.10 a gallon in June 2004.

Hood's Suever says he thinks the farm price will rise another 10 cents a gallon before it levels and possibly starts to decline.

He said US milk supplies are unlikely to increase dramatically because farmers are still struggling with high feed and energy costs, far fewer farmers are injecting their cows with synthetic hormones to boost milk production, and Asian countries continue to buy US dairy products.

"We are in a different dynamic now," he said.

Dick Kimball , the owner of a 350-cow dairy farm in Spencer, said he's making money now on his milk sales but lost about $250,000 last year. He said it was his worst year since he started dairy farming 34 years ago.

With the profits from this year and the relief check he expects to receive from the state in the next few weeks, Kimball said, he hopes to come close to breaking even for 2006 and 2007 combined.

Kimball said he wants consumers to know that milk processors and retailers are the ones profiting from milk, a charge disputed by supermarket industry officials.

Kimball said processors and retailers maintain their profit margins as the cost of milk rises and falls. He said farmers receive less than 40 cents of every dollar consumers spend on milk.

"It used to be 50-50," he said, "but now these guys have figured out that the dairy case is one of the biggest profit centers in the store."

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