Milk heading toward record high

Jun 25, 2007 12:47 PM

From News Reports

Milk is hovering around $4 a gallon in the Chicago area, and could cost as much as $4.25 a gallon to $4.50 a gallon by September.

Bill Brooks, a dairy economist with Downes-O’Neill, one of the nation’s largest dairy product brokerage firms, attributes the higher price to what he calls a new competitor – ethanol.

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.

Despite soaring milk prices, the U.S. Department of Agriculture reports 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.

The effect is being felt on other food prices as well. 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 AMI 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.”

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.

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