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Ready for $4 a gallon milk?
Tight supplies and a big increase in payments to dairy farmers mean pricier milk, cheese and lattes.
By MSN Money staff and news services
Get ready for a healthy helping of sticker shock in the dairy aisles.
Milk prices have just shot up to their highest level in years, and the move is taking the price of everything from cheese to butter to coffee drinks up with it.
"We are currently facing one of the most challenging commodity environments we have ever seen," said Gregg Engles, CEO of Dean Foods (DF, news, msgs), a milk producer.
The retail price of milk has climbed to around $4 a gallon in some grocery stores around the United States, and there's no relief in sight. Not long ago, a gallon jug could be had for less than $3.
Mad cow and feed prices
Why the increase? For starters, production has fallen because imports of Canadian dairy products were stopped when mad cow disease was discovered in that country a year ago. Meantime, according to Jerry Kozak, president, National Milk Producers Federation, depressed prices for the past couple of years have reduced U.S. milk output so much that supply now can't keep up with demand. High feed prices and a sheer reduction in the number of U.S. cattle -- to below 9 million for the first time in years -- has exacerbated the problem, as well.
The U.S. government regulates the price farmers are paid for the milk they produce, and that number just jumped for the first time in years by 50 cents -- to $1.69 a gallon, from $1.19. That said, farmer payments account for only about one-third of milk prices, with the balance going to processors, distributors, grocers, and others.
The result of these pricing trends extends across a broad spectrum of everyday products.
For instance, Starbucks (SBUX, news, msgs), the world's largest coffee shop chain, is considering its first systemwide price increase in nearly four years, its chief executive said on Tuesday. "If it stayed at these levels or went higher for any long period of time, we might have to think about it," Orin Smith told Reuters on the sidelines of the Milken Institute's Global Conference in Los Angeles. Starbucks, which has about 4,000 stores in North America, has not had a systemwide price increase since August 2000.
Price hikes are coming throughout the dairy industry. Because of the raised price of raw materials, Kraft Foods (KFT, news, msgs), which also makes Philadelphia cream cheese and Kraft singles, recently raised prices on cheese between 5% and 15%.
Organics within reach
Ironically, the milk-price increase may give new advantages to producers of organic dairy products, which have grown in popularity in recent years. The reason: It's no longer much more expensive than regular milk.
According to Reuters, a half-gallon carton of Organic Valley brand whole milk costs $3.69 on FreshDirect, for instance, compared with $1.99 for a half-gallon of conventional whole milk.
"The price gap is narrowing," Phil Lempert, a market researcher who runs the Web site supermarketguru.com, told Reuters. "Dairy products for organics are going to hover at about 10% more than non-organics, and when it becomes 10% more it's within reach of practically everybody."
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