Here’s why milk prices are high and expected to get higher

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Posted: Thursday, March 20, 2014 12:00 am

Consumers across the country are probably splashing a little less milk on their cereal as prices climb through record levels, thanks to global demand for dairy products.

While prices are climbing toward the $5-a-gallon mark in a few stores across the Omaha metro area, some shoppers are finding ways to use less milk, even if it means changing retail preferences or modifying eating habits at home.

“I've been pushing fruit juice for my kids to drink instead of milk because it's gotten so expensive,” said Lisa Norgard, 38, of Omaha.

Norgard was shopping on Tuesday at the Aldi near 132nd Street and West Center Road, where a gallon of whole milk was selling for $1.99 per gallon. She said she typically shops for groceries at Walmart, but swelling milk prices forced her to find another option.

“Even at $3 a gallon, it's still reasonable where my family can drink it and make food,” Norgard said, “but if it's $4 or $5 a gallon, that's insane.”

A sampling of the lowest prices being charged for a gallon of whole milk across the Omaha metro area on Tuesday ranged from a high of $4.69 at Wohlner's Grocery & Deli at Midtown Crossing to the low of $1.99 at the West Center Aldi.

Export demand that has limited supply is largely to blame for the uptick in consumer prices — along with transportation and storage costs, to a degree.

Nebraska producers have welcomed the increase.

Lowell Mueller, an owner and partner at Vi-View Farms near Hooper, Neb., said margins for his 200-cow dairy farm have improved this year after a tough 2013. Most of the milk his cows produce goes to Hiland Dairy in Omaha.

Drought conditions through 2012 depressed production and corn prices achieved a record high that year, making feed prices tough to swallow.

“We look at margins more than prices, that's all that really matters to us,” Mueller said.

Margins, or the spread between producers' input costs and prices they're paid for milk, were at the heart of reform to dairy provisions in the latest version of the federal farm bill.

Consumer prices for milk are likely to rise 40 more cents or so, but the new farm bill provisions “should only make milk more affordable in the long run,” said Marin Bozic, assistant professor in dairy foods marketing economics at the University of Minnesota.

He said changes are “equally friendly to dairies of all sizes,” unlike the previous policy that had limits on payment totals and income levels when prices bottomed out. The new policy protects producers' margins instead of focusing strictly on prices, helping producers better manage risk.

“It means there are no government hard-stops for milk prices falling as low as they need to equalize the market,” Bozic said.

Helping producers' margins in the near-term is record export demand for American milk products for everything from cheese to milk powder.

Data from the U.S. Dairy Export Council showed exports to Mexico, the top destination for U.S. dairy products, spiked 28 percent in January. Exports to China were up 55 percent and exports to Southeast Asia were up 78 percent.

The value of American dairy exports in January spiked 35 percent over year-ago levels to $583.7 million. That's about as much as suppliers exported through the final four months of 2013, the U.S. Dairy Export Council reported.

Meanwhile, corn prices have receded from their 2012 highs. Mueller said it helps that his farm also produces about 1,200 acres of row crops, including corn. Dairy farms that rely on feed suppliers rather than home-grown stocks “have really struggled” in recent years, Mueller said.

But rising wholesale prices are helping all kinds of dairy farmers. In February, suppliers on average paid U.S. farmers about 27 percent more for milk than at the same time last year, setting an all-time high of $24.70 per hundredweight, according to the U.S. Department of Agriculture.

When data for subsequent months is published, it should show a sustained upswing because of the elevated export demand.

While global demand has benefited farmers like Mueller, it has spilled into the supermarket aisle, where milk money is no longer chump change.

Mike Schwartz, owner and CEO of Wohlner's Midtown Crossing, said he's seen wholesale prices increase 40 to 50 cents per gallon as supplies have dropped because of higher demand. Prices typically slide during the springtime, but Schwartz said they'll probably continue to rise this year.

On the national level, the Bureau of Labor Statistics reported five straight months of price increases for a gallon of milk through January, the last month for which data are available. Data showed a national average price per gallon of $3.55.

That's also the same month American dairy exports hit all-time highs in a number of categories, and experts expect prices to keep climbing as the market continues to see demand stacked well over supply.

“Wholesale prices are at record highs, but because of lags in pricing systems, they haven't been passed along all the way through retail yet,” said Al Levitt, vice president of communications for the U.S. Dairy Export Council.

As prices continue to rise, don't expect consumers to quit buying milk altogether, however.

Harry Balzer, chief industry analyst for NPD Group, said milk is one of the 10 most popular food items that Americans consume. A higher expense for milk — or any other staple food product, for that matter — doesn't mean it will disappear from the shopping list.

“Price just affects frequency, so instead of having it eight times a week, we'll have it seven times,” Balzer said. “It takes a long time, but we find a way to make it work.”

Chris Widick, a 49-year-old Omaha mother of two, is already doing just that.

Widick picked up a gallon of milk at the Baker's near 132nd Street and West Maple Road because it was part of an in-store promotion. “The only reason I'm getting milk is because it's free,” she said.

Like Norgard, Widick said she's already begun avoiding certain recipes that require more milk.

“I think when a gallon of milk costs more than a gallon of gas,” she said, “that's when there's a problem.”

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