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Originally published May 25, 2007 at 12:00 AM | Page modified May 25, 2007 at 2:01 AM

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Got milk money? Prices up as world wants more dairy

Farmers haven't kept up with the rising consumption of dairy products in countries like India and China.

Bloombrg News

Milk prices worldwide are rising at the fastest rate ever and won't fall anytime soon because of growing demand in China and Latin America and dwindling government supplies.

Dairy farmers have failed to keep pace with a 3 percent increase in annual milk consumption, according to Rabobank Groep in the Netherlands, the world's biggest agricultural lender. Reduced subsidies eliminated milk surpluses in Europe and slowed production growth in the U.S., government data show.

The price rally started last year after Australia reduced exports because of its worst drought in a century.

"Over the next several months, we're going to see some pretty strong prices on all milk," said Larry Salathe, an economist and dairy expert at the U.S. Department of Agriculture in Washington.

Production needed to bring prices down "takes at least several months, usually a year to two years, to come."

Skim milk powder, the benchmark for world trade, rose 60 percent in six months to a record $1.58 a pound May 4 on the Chicago Mercantile Exchange. That was 74 percent higher than the five-year average.

During the first five months of 2006, prices fell 14 percent.

Fluid-milk futures on the exchange advanced to a record $19.15 per 100 pounds on May 3 and have risen 63 percent in the past year.

Milk prices at U.S. stores averaged $3.32 a gallon in April, up 2.9 percent from a year earlier, USDA data show.

Government-aid officials say food programs for children in Indonesia, Mexico, the Philippines and Algeria are likely to be scaled back because of the rising costs.

About 80 percent of the world's exported milk powder is sold to developing countries.

Corporations also are feeling the pinch. Hershey, the biggest U.S. candy maker, and Dean Foods, the nation's largest milk processor, said this month that higher dairy costs will hinder profit growth.

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Domino's Pizza said it will spend more on cheese, which accounts for 30 percent of the cost of each pizza.

This year's price rally is different from increases in previous years because government surpluses are no longer available in dairy-producing countries such as the U.S., the largest exporter of milk powder, and the EU, the largest exporter of cheese.

U.S. inventories of butter, cheese and dry milk peaked at more than 2.7 billion pounds in 1983. The government that year spent $2.5 billion on surplus dairy products to support prices and farmer income.

Today, the U.S. has no surplus after selling the 27 million pounds it held in 2005, USDA data show. European warehouses are nearly empty.

The world consumes about 1.9 billion liters of milk a day, enough to fill five supertankers, based on estimates by Rabobank.

The 14 percent jump in milk demand during the past seven years outpaced the 13 percent rise in oil use, according to estimates from the International Energy Agency in Paris.

"We will see some rationing in the months ahead because you can't make the cow make more milk," said Ken Bailey, an associate professor at Pennsylvania State University who studies dairy markets.

"Prices haven't hit their high," Bailey said last week in an interview. "We're going to hit the high right around October."

Chinese consumers, who drink an average 1.3 ounces of milk a day, will increase demand by as much as 15 percent annually for the next three years, said Mark Voorbergen, a dairy analyst at Rabobank.

India's gains will range from 3 percent for milk to 7 percent for processed dairy products, he said.

"We're expecting to see the highest growth in dairy consumption in China because the Chinese government has started sponsoring school milk programs," said Rabobank's Voorbergen.

"That means there are now generations of Chinese children growing up who drink a cup of milk every day. This is something completely new, as the Chinese are not traditional dairy consumers."

While the 2.5 billion people in China and India are drinking more milk than ever, they still have a long way to go before catching the United States.

Per-capita demand in the U.S., buoyed by the "Got Milk" promotions begun in 1993 by the California Milk Advisory Board, averages 25 ounces a day, almost four times the amount in India and 19 times more than in China.

While demand climbs, milk production may drop because the cost of corn, the primary source of livestock feed, has advanced 55 percent in the past year to $3.6925 a bushel on the Chicago Board of Trade.

Rising demand for grain-based ethanol has increased the price of corn feed and may prevent dairy farmers from expanding their cow herds, agricultural analysts say.

"Producers are still a little scared of the high feed costs," said Joel Karlin, commodity sales coordinator for Western Milling in Goshen, Calif. Feed accounts for half the cost of producing 100 pounds of milk in the U.S.

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