Image: Gallons of milk
Charles Rex Arbogast  /  AP
The price of a gallon of milk has flirted with the $4 level in much of the country. Companies that use dairy products are passing along costs — but not Domino's Pizza, since competition is too feirce.
updated 5/30/2007 6:03:45 PM ET 2007-05-30T22:03:45

Liz Kooy loves sharp cheddar cheese and is willing to pay almost any price for it.

“Ten dollars a brick, I’d still buy it” and cut back on other purchases, the 36-year-old social worker laughed as she browsed the dairy aisle in a grocery store near downtown Chicago on Wednesday.

She might want to start looking for places to cut back.

Dairy market forecasters are warning that consumers can expect a sharp increase in dairy prices this summer. By June, the milk futures market predicts, the price paid to farmers will have increased 50 percent this year — driven by higher costs of transporting milk to market and increased demand for corn to produce ethanol.

U.S. retail milk prices have increased about 3 percent, or roughly a dime a gallon, this year, according to the U.S. Department of Agriculture.

But University of Illinois dairy specialist Michael Hutjens forecasts further increases of up to 40 cents a gallon for milk over the next few months, and up to 60 cents for a pound of cheese.

That would drive the cost of a gallon of whole milk around the country to an average of $3.78, based on the USDA’s monthly survey of milk prices in 30 metro areas.

Video: Ethanol demand causes rising food prices Prices in the last survey, earlier this month, ranged from $2.76 a gallon in Dallas to $3.86 in Chicago and $4.09 in New Orleans, where the dairy industry has struggled to bounce back from Hurricane Katrina.

Hutjens and others said higher gasoline prices have increased the costs of moving milk from farm to market, and corn — the primary feed for dairy cattle — is being gobbled up by producers of the fuel-additive ethanol. The USDA projects that 3.2 billion bushels of this year’s corn crop will be used to make ethanol, a 52 percent increase over 2006.

Ethanol has increased the average American's grocery bill $47 since July, and Iowa State University study concluded.

“There is no free lunch,” Hutjens said. “That corn then has to come away from that dedicated resource.”

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Chris Galen, a spokesman for the National Milk Producers Federation, pointed to another factor: Global demand for milk, he said, has grown in the past few years, primarily in the new Asian economic powers.

“China of course is a big story,” he said. “They’re consuming more (milk protein); they’re using more dairy ingredients in animal feed.”

In years past, that demand might have been met by Australia and New Zealand, he said. But drought in Australia and the limits of New Zealand’s dairy industry have pushed China and its neighbors to buy American.

Hutjens said the biggest dairy price spikes are likely to come later this summer in the areas farthest from the Midwest corn and grain fields that feed most of the country’s dairy cattle.

“Certainly I think you’re gonna see it worse in places like the Southeast — in Georgia and Florida — and California,” he said.

The USDA doesn’t survey prices in California because the state sets minimum farm-level prices, skewing retail dairy prices. But those retail prices are near $4 a gallon in many cities there, too.

Von’s, one of the major chains operating in California, charged $3.99 for a gallon of whole milk at its Los Angeles-area stores on Wednesday, according to its Web site.

Like consumers, companies that use milk, cheese and other dairy products are expecting to spend more the rest of this year.

Hershey Co., the country’s biggest candy maker, recently scaled back its earnings expectations for this year, due in part to higher dairy costs. Kraft Foods Inc. raised prices earlier this year on some dairy-based products.

Similarly, Domino’s Pizza recently said that it expects to pay more through the rest of this year for the cheese it melts on top of more than a million pizzas every day. But Domino’s says it probably won’t raise the price of a pizza because its industry is too competitive, spokesman Tim McIntyre said.

“Margins get squeezed when prices go up, but everything goes in cycles,” he said in an e-mailed statement. “We plan for this and ride the wave.”

Competition might be the best guard against rapid increases in retail dairy prices, too, said the Milk Producers Federation’s Galen.

Mass-market retailers such as Wal-Mart, Target and Costco, he said, often sell milk at cost to pull in customers, then make their money elsewhere. That tends to limit how high grocers can raise their prices for milk.

The last dramatic dairy-price increases were in 2004, when — following a period of low prices — production fell and many farmers left the business, Galen said. The increase was sharp, he said.

This time, prices appear to be heading for a more sustained plateau, Galen said.

No matter, many consumers say. Similar to the way they continue to buy just as much gasoline now as they did before prices spiked this year, higher dairy prices won’t change how much they buy.

Chicago interior designer Denise Olsen, 41, said as she shopped Wednesday that she won’t change how much milk, cheese and yogurt her family buys.

“Gas and food are necessities, where I don’t need a new pair of shorts for the summer,” she said.

© 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed. Reuters contributed to this report.


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