Milk prices hit the roof on surging demand

Dairy output fails to keep pace with demand from China and Latin America.

Milk prices worldwide are rising at the fastest rate ever and won't be falling anytime soon because of growing demand in China and Latin America and dwindling government supplies.

Dairy farmers have failed to keep pace with a 3 per cent increase in annual milk consumption, according to Rabobank Groep in the Netherlands, the world's biggest agricultural lender. Reduced subsidies eliminated milk surpluses in Europe and slowed production growth in the US, government data show. The rally started last year after Australia reduced exports because of its worst drought in a century.

"Over the next several months, we're going to see some pretty strong prices on all milk," said Larry Salathe, an economist and dairy expert at the US Department of Agriculture in Washington. Production needed to bring prices down "takes at least several months, usually a year to two years, to come."

Skim-milk powder, the benchmark for world trade, has risen 60 per cent in six months to a record $1.58 a pound May 4 on the Chicago Mercantile Exchange, seven times higher than the five-year average.

During the first five months last year, prices fell 14 per cent. Fluid milk futures on the exchange advanced to a record $19.15 on May 3 and have risen 63 per cent in the past year. The commodity traded at $18.75 on Friday.

Hershey, the biggest US candy maker, and Dean Foods Co, the nation's largest milk processor, said this month that higher dairy costs will hinder profit growth. Domino's Pizza said it will spend more on cheese, which accounts for 30 per cent of the cost of each pizza.

Government aid officials say food programmes for children in Indonesia, Mexico, the Philippines and Algeria are likely to be scaled back because of the rising costs. About 80 per cent of the world's exported milk powder is sold to developing countries.

"Programmes to feed the poor will face difficulties,'' said Merritt Cluff, an economist with the United Nations Food and Agriculture Organization in Rome, which monitors food security worldwide. "They'll be able to buy less, or they'd have to buy alternative sources such as wheat, but prices for wheat and maize have also risen."

Mexico, the top importer of US dairy products and a buyer of almost $1.4 billion of foreign supply in 2005, cut purchases of milk powder by 28 per cent last year and may buy less again this year because of higher prices, a US Department of Agriculture report showed in November. Mexico already has capped tortilla prices to keep inflation in check.

Raghuveera Reddy, agriculture minister for Andhra Pradesh, said rising milk costs "will have an impact" on the country's consumers.

This year's rally is different from increases in previous years because government surpluses are no longer available in dairy-producing countries such as the US, the largest exporter of milk powder, and the EU, the largest exporter of cheese.