The Price of Milk and Cheese: Mooooo-ving Higher in the US

"Drink your milk!" - the classic admonition to children - may be said today with greater urgency by economy-minded parents as the price of the drink spurts to a record high.

The price farmers receive for milk rose to $16.20 per 100 pounds last month, surpassing by 20 cents the previous record set in 1989, the US Department of Agriculture (USDA) said Monday. As demand continues to outpace supply, the prices dairy farmers receive and consumers pay should continue to go up at least until next spring, according to estimates by agricultural economists.

Despite the recent record price spike, American consumers still buy milk today at a lower real cost than in 1989. The price inched up less than 2 percent a year this decade, well below the inflation rate and the rise in the cost for the standard grocery cart of food.

"Dairy products are still a good buy compared to other foods and other consumer products," says Charles Shaw, senior economist at the International Dairy Foods Association in Washington.

After badly lagging behind the jump in feed costs, the higher milk price is a welcome relief for dairy farmers. It should slightly bolster their profits, even though it is yet another sign of price volatility.

Prospering dairy farmers are just part of a booming US farm economy. Net farm income will hit a record $51 billion this year, up 46 percent from 1995, the USDA said Friday. Total receipts of farmers will surge 9 percent this year to a record $108 billion, because scant world stockpiles of grain raised wheat and corn prices to record levels early this year. Crop prices have recently fallen back but are still near historical highs.

The milk price is moving up in response to unusually high prices for corn, soybeans, and concentrate feeds, as well as poor yields of good quality hay. Because of a surge in feed costs as high as 70 percent, some farmers have culled herds and cut production; others have slowed plans for expansion; and some have retired earlier than planned, experts say. (Feed accounts for about half of a dairy farm's costs.) Import restrictions also curtail the supply of dairy products.

Meanwhile, the demand for milk and other dairy products - especially cheese - has outstripped production. Commercial sales of dairy products expanded 3 percent in both 1994 and 1995. This year, despite price increases, sales should rise 1 percent, says Bob Cropp, dairy marketing specialist at the University of Wisconsin in Madison.

The high price reflects "tight milk production and very strong consumption - this is strictly the law of supply and demand working at its best," says Tom Thieding, spokesman for the Wisconsin Farm Bureau in Madison. Retail dairy prices should rise 6 to 7 percent this year and 2 to 5 percent in 1997, according to the USDA.

The jump in the milk price continues a trend in greater volatility caused by the gradual withdrawal of government price supports. Since 1989 the government has offered to buy milk for less than the market price. During a typical year, therefore, the price a farmer receives for 100 pounds of milk might zig-zag more than 15 percent, a much greater swing than during the heyday of government market intervention from 1950 until the mid-1980s, says Mr. Cropp.

"With the government out of the picture, we see sharper fluctuations in the milk market," says Art Menut, legislative director at the Vermont Farm Bureau in Richmond, Vt. "You used to have lazy ups and downs over eight months. Now they rise and fall over a 90-day period or shorter."

The greater volatility has sped consolidation. "With no government price supports, more volatility and uncertainty, and milk prices pretty flat while cost of production is rising, small farms that cannot make technological changes are exiting and the farmers who are left are growing," Cropp says.

David and Patricia Endres are some of the winners from the gyrating prices of the free market. They expect to see a modest uptick in profits this year at their 365-acre dairy farm in Lodi, Wis. With this in mind, they plan to expand their herd from 220 to 400 cows within five years. "Right now we haven't seen any big increase in profit - a lot of it is going right back out in feed costs - but we are making a little bit more," Ms. Endres says. She expects to see dairy prices remain high "because the demand for cheese, butter, and milk is going up, and there are a lot of people getting out of business because feed costs are so high."

"The Superbowl is one of the largest cheese consumption days of the year," adds Mr. Thieding. "If the [Green Bay] Packers get in, you'll see that carried through for sure."