Milk Money Is Leaving Many Customers Sour
Monday, June 25, 2007PAUL KANGAS: There's a new sticker shock in America. Consumers are feeling pain not only at the gas pump, but also in the dairy aisle. Milk prices have surged to record levels and as Erika Miller reports, that's worrying some economists.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: These are good times for dairy farmers like Richard Byma. With milk prices at record highs, he says it's desperately need relief for the industry after a year of low prices.
RICHARD BYMA, OWNER, BY-ACRES HOLSTEINS: We are making money at the present time, which is a good feeling because it has been the last 13, 14 months we've been below costs. We've used up all our savings and had to borrow some money.
MILLER: At the Chicago Mercantile Exchange, milk futures have surged about 45 percent since the start of March. That has pushed up the retail price of whole milk to about $3.25 a gallon on average nationwide. That's more than a gallon of gasoline in most of the country. Rising milk prices are having a domino effect, pushing up the prices of other dairy items including butter, cheese, yogurt and ice cream. Farmers say the increase is the result of rising production costs. Higher energy prices have made it more expensive to get products to market. In addition, it is costing farmers more to feed their cows. Corn prices have shot higher, as more of the crop gets diverted to ethanol production.
BYMA: Since ethanol has come into the picture, we have to pay twice as much for our feed than we did a year ago. So those costs have doubled.
MILLER: Industry experts predict milk prices will continue to rise because supplies remain tight. The world's milk supply has been sapped by drought in Australia and lower subsidies in Europe. Futures trader Brian Rice says demand for dairy products remains strong, here and abroad.
BRIAN RICE. DAIRY FUTURES TRADER, RICE DAIRY: International demand has been the biggest driver. If you look at population growth combined with wealth increases in Asia, that equals more food consumption, especially in dairy proteins.
MILLER: Consumers aren't the only ones feeling the pinch from higher dairy prices. Major food corporations say they're also being hit hard. Hershey's and Starbucks have both recently said higher dairy costs are hurting profits. Dean Foods, the maker of Horizon Brand milk, also says earnings are suffering because the cost of producing its products is rising faster than retail prices. Dominos Pizza expects to pay more for cheese through the rest of the year. Cheese accounts for about a third of the cost of each pizza. Rising food prices are worrying some economists. Carl Weinberg of High Frequency Economics says they pose a greater threat to the U.S. economy than high gasoline prices.
CARL WEINBERG, CHIEF ECONOMIST, HIGH FREQUENCY ECONOMICS: Food is three times more important in our CPI than energy. So that a rise in food prices could potentially have a bigger impact on our spending on other goods and services than energy prices were the shock to become big enough.
MILLER: So far, consumers haven't cut back on milk and other staples. Most people would rather slash spending in other areas than take food off the table. Erika Miller, NIGHTLY BUSINESS REPORT, Sussex, New Jersey.
