Milk Costs Most in 6 Years as Law Delay Risks More Gains

Prices for nonfat-dry milk, the biggest U.S. dairy export, rose to a six-year high on increasing overseas demand at a time when Congress’s failure to extend an expired farm law leaves the threat of surging consumer costs.

The price of nonfat-dry milk averaged $1.9363 a pound in the week ended Dec. 7, the highest since November 2007, the U.S. Department of Agriculture said in a report yesterday, citing the average received by manufacturers surveyed by the agency. Domestic exporters shipped a record 464,989 metric tons of the product in the 10 months through Oct. 31, according to U.S. Dairy Export Council data.

Global dairy prices tracked by the United Nations jumped 22 percent this year, compared with a 3.6 percent drop in overall food costs. If Congress doesn’t act before year’s end, U.S. dairy support programs will revert to a 1949 statute that when fully implemented would double the wholesale price of milk. Agriculture Secretary Tom Vilsack said cost-raising rules wouldn’t be implemented in January.

“The big reason for higher prices is a very, very strong export market,” said Bob Cropp, an economist at the University of Wisconsin in Madison, who has been following the dairy industry since 1966. “The world milk supply until this last fall was running lower than a year ago in many countries, or was not up much. World demand has stayed very strong.”

Agriculture Prices

Prices for nonfat-dry milk climbed 27 percent this year, according to government data. Futures of class III milk, used to make cheese, rose 1.7 percent on the Chicago Mercantile Exchange, while the Standard & Poor’s GSCI Spot Index of 24 commodities fell 3.1 percent. The MSCI All-Country World Index of equities jumped 15 percent. The Bloomberg U.S. Dollar Index of 10 major trading partners gained 3.1 percent.

Dairy prices are climbing at a time when many agriculture commodities are tumbling after farmers increased grain production, sending corn and wheat into bear markets. Global food costs tracked by the UN are 13 percent below the record set in February 2011. Farmland in the U.S., the world’s biggest corn grower, is recovering from last year’s drought, the most-severe since the 1930s.

U.S. corn output will surge to a record 13.989 billion bushels this year, the government said Dec. 10. Futures in Chicago slumped 49 percent to $4.3425 a bushel from a record $8.49 in August 2012.

Asian Demand

China, the biggest whole milk powder buyer, will have a shortage of raw milk for at least three years after domestic herds contracted, Macquarie Group Ltd. said Nov. 28. Asian countries may boost purchases of U.S. and European supplies as demand for milk products grows faster than output can rise in main foreign suppliers in Australia and New Zealand, Detlef Schoen, a managing partner at Aquila Capital, said Dec. 5.

The specter of higher prices still hangs over lawmakers. An extension of U.S. agriculture subsidies to late January was rebuffed on Dec. 10 by Senate Democrats, who said they won’t pass any House plan for temporary funding before Congress breaks for the holidays. Dairy is the first crop program set to revert to the 1949 policies if there’s no deal by the end of the year.

Under the law, the government would be required to stockpile milk until it reached $37.20 per hundred pounds, almost double the current price of dairy futures traded in Chicago. The USDA is required to draft rules to implement the law, which means lawmakers have a window to act, given the challenges of creating programs based on policies from more than six decades earlier.

‘Slim Possibility’

The reprieve makes unnecessary a short-term revival of the most-recent law, which was passed in 2008 and expired Sept. 30, and should give congressional negotiators time to complete a new bill, Vilsack told reporters in a conference call yesterday.

The market is not taking seriously the threat of a doubling of milk prices, said Bill Brooks, a dairy economist at INTL FCStone Inc. in Kansas City, Missouri.

“It’s very, very, very slim possibility that we’ll see any kind of increase based upon federal legislation,” Brooks, who grew up on a Missouri dairy farm and has covered the industry for about two decades, said in a telephone interview. “It’s on people’s radar screens, but not from the standpoint that it’s really going to impact markets any.”

On the CME, milk for December delivery fell 0.6 percent to close at $18.92 per 100 pounds at 1:10 p.m. in Chicago. Futures are heading for a second straight quarterly gain.

Record Shipments

U.S. milk exports totaled $5.54 billion in the first 10 months of 2013, up 28 percent from the same period in 2012, according to Alan Levitt, a spokesman for the Arlington, Virginia-based export council. The shipments for this year have already topped an annual record, he said.

The gains for the dry good signal higher costs for the milk consumers drink as demand increases, said University of Wisconsin’s Cropp.

The price of fluid or drinking milk is calculated based on the cost of the nonfat-dry product and the class of the commodity that is used to make cheese, depending on which is higher, said FCStone’s Brooks. Nonfat-dry costs have been the “driving force behind our drinking-milk prices since March,” because they’ve been higher than the value for the cheese ingredient, he said.

Fonterra Cooperative Group Ltd. (FSF), the world’s largest dairy exporter, has said it can’t increase milk-powder production quickly enough to meet soaring demand from China and other emerging economies. The gains in consumption are “an extraordinary situation,” John Wilson, chairman of the Auckland-based company, said in a statement yesterday.

To contact the reporter on this story: Elizabeth Campbell in Chicago at ecampbell14@bloomberg.net

To contact the editor responsible for this story: Millie Munshi at mmunshi@bloomberg.net

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