Chicago Tribune, United States
06-15-07
Milk chugs toward record high
Demand for ethanol drives up dairy costs
By John Schmeltzer
Tribune staff reporter
Milk, already hovering around $4 a gallon in the Chicago area, could cost as
much as $4.25 a gallon to $4.50 a gallon by September.
In Florida, milk is likely to rise to more than $5 a gallon, Bill Brooks, a dairy
economist with Downes-O'Neill, one of the nation's largest dairy product
brokerage firms, said Thursday.
"We have a new competitor," Brooks told more than 100 people at a conference
of producers and processors in Chicago. He said dairy farmers are paying higher
prices to feed their cows as a result of ethanol production that depends on corn
and other rough grains. "And the government is subsidizing this competitor."
Brooks was referring to the 51 cents-per-gallon subsidy that is paid to ethanol
producers by the government. The payment is designed to keep the costs low for
ethanol and encourage its increased use as a fuel alternative to gasoline.
Corn prices have surged 73 percent in the past year on higher ethanol demand,
reaching a 10-year high of $4.5025 a bushel on Feb. 26. On Thursday, corn rose
to a three-month high on the Chicago Board of Trade, closing at $4.095 per
bushel.
Earlier this week, Dean Foods Co., the country's largest milk processor,
predicted that raw-milk prices will set a record later this year.
Despite soaring milk prices, the U.S. Department of Agriculture said Thursday
that farmers are reluctant to increase the size of their herds when prices for feed
are rising faster than the price of milk. That means production is expected to be
limited.
Prices for other foods are also rising.
The American Meat Institute, which represents the nation's beef, pork and
chicken producers, said that corn previously used to feed animals is increasingly
being diverted to ethanol production.
"Saying rising feed prices don't have a direct impact on the cost of food is as
ridiculous as saying that rising gasoline prices will not result in people paying
more to fill up their cars," said David Ray, an institute spokesman.
Already, consumers are paying 8 percent to 10 percent more for breakfast foods
than a year ago because of the rising prices for corn, wheat, milk and other
commodities, according to the Department of Agriculture.
Retail prices for orange juice have risen 20 percent to 25 percent from a year
ago, while eggs have climbed 15 percent to 20 percent. Overall, food prices are
expected to rise 3.5 percent to 4.5 percent, about 1 percentage point higher than
in 2006, the USDA estimates.
Carl Weinberg, chief economist for High Frequency Economics, has warned that
higher food prices could spell trouble for the U.S. economy.
"The trend in food prices did not go well in the 1970s, and we fear that a repeat
of that squeeze is in progress now," he wrote in a note last week.
The USDA estimated this week global grain stockpiles could drop more than 5
percent this year as a result of increased demand and droughts.
Weinberg said the new estimate means there might only be a 53-day supply at
the end of the year compared to the 69.9-day supply just two years ago.
"These stockpiles estimates are as low as they have been since the early 1970s,
and that is not good news," he said Thursday. "If food prices jump, then inflation
measures will jump."
An Iowa State University study of the impact ethanol consumption is having on
food prices appears to confirm many of Weinberg's concerns.
The study projects that consumers could wind up spending $47 more per person
annually on food if oil prices remain above $65 a barrel and grain prices keep
rising. Oil closed Thursday at $67.65 a barrel, up $1.39, on the New York
Mercantile Exchange.
On Thursday, Brian Hoops, an analyst with Midwest Market Solutions in Yankton,
S.D., told Bloomberg News that farmers may liquidate hog herds to avoid paying
higher feed costs. Hog prices are up 22 percent this year on export demand for
pork and higher corn costs. Beef prices are only a little behind; they have risen
16 percent in the past year, reaching a record $1.02925 a pound on March 12.
Congress is considering legislation that would require a 36 billion-gallon
renewable-fuel standard, nearly four times higher than 7.5 billion-gallon standard
required to be met by 2012. Most experts say that the standard will be met
mainly with increased production of ethanol and biodiesel fuel.
"The problem with government mandates is that they are not responsive to
market signals or problems like drought," said Ray from the meat institute. "In
terms of food prices, near term, we see the problem getting worse, not better." ---