Drought, demand driving up dairy prices

Milk prices hit their highest prices since 2011, and recent price spikes might remain on grocery bills for a long time.

The severe drought is increasing costs for California dairy farmers and has some wondering whether farmers will decrease production as they consider selling cows instead of paying increased costs to feed them. 

California milk production has gone up so far this year, but farmers’ profit margins are diminishing as the drought has forced farmers to buy cattle food, such as alfalfa, from out-of-state, said Western United Dairymen CEO Michael Marsh, whose non-profit represents 60 percent of milk production in California. The higher costs are a problem for farmers still recovering from the recession.

California produces about 3 percent of the world’s milk, he said. While global demand is the biggest reason for price increases, Marsh said there is a chance higher prices push more and more farmers out of the industry. Such departures could lower supply at a time of growing global demand.

According to the U.S. Bureau of Labor Statistics, milk cost less than $3 per gallon in early 2004. It spiked toward $4 per gallon in 2007, but fell back to the $2.90-$3.10 range in 2009.

The price has climbed steadily since. In March, a gallon sold for an average of $3.67.

Taking out production would impact the market longer than typical year-to-year fluctuations, said Ricky Volpe, an economist for the U.S. Department of Agriculture Economic Research Service.

“For the most part, it can’t just be cycled right back to full production immediately,” he said.

U.S. Dairy Export Council Vice President Alan Levitt said projecting how events will impact the dairy industry can be difficult. Higher prices for milk could make farmers more willing to pay higher prices for feed and continue production.

Also, January and February proved to be good months for milk production despite the drought. Comfortable cows, he said, produce more milk and cows are more comfortable in drier conditions.

“Dairy has a way of tricking us with this stuff,” he said.

Levitt said projections show wholesale prices peaking in March and April with retail prices consumers see a peak a couple months later.

Marsh said spring is typically a good season for milk production before the hot weather limits the amount of milk cows produce.

While milk prices could rise, other dairy products probably will not.

Prices for dairy products such as ice cream and cheese are not impacted in the same ways as milk because the former foods last longer and often have longer contracts between retailers and producers.

Dairy is not the only food product impacted by the drought. Broccoli, winter lettuce, cantaloupes and garlic suffering lost production, according to the California Farm Water Coalition.

Volpe said the foods impacted by the drought make up about 16 percent of the typical shopper’s grocery basket. Though some of the products impacted could be replaced with other foods not impacted by price increases.

Volpe said he doesn’t anticipate prices impacting the Consumer Price Index until late summer or early fall.

Drought conditions, meanwhile, are expected to remain through the summer, Scripps Meteorologist Jason Meyers said. But the problem could diminish by the end of 2014.

“Things are looking pretty bad as far as the drought is concerned for the next few months, but by the end of the year, El Nino may start to form, which should help alleviate things,” Meyers said.

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