May 18 (Bloomberg) -- U.S. dairies are generating record production as farmers seek to benefit from a rally in milk prices that is boosting costs for shoppers at Wal-Mart Stores Inc. and eroding profit for Starbucks Corp.
Milk output totaled 16.662 billion pounds in April, up 1.5 percent from a year earlier, and the highest ever for the month, the U.S. Department of Agriculture said today in a report. Last week, the agency forecast record domestic output through next year.
Milk futures are up 24 percent this year in Chicago as exports surged to Asia and domestic demand increased. The retail price of dairy products will rise as much as 5.5 percent this year, faster than overall food costs, the government has forecast. To profit from the increase, farmers are expanding herds and boosting productivity per cow, USDA data show.
U.S. producers “have every incentive to keep producing and expanding supplies whenever they can,” said Michael Swanson, a Minneapolis-based economist at Wells Fargo & Co., the largest U.S. agricultural lender. “With the weak dollar and growing Asian demand, we can sell all this milk that we’re producing at these prices or even better.”
In April, the dairy herd expanded to 9.186 million head, up 1.1 percent from a four-year low in December 2009, and the highest since July 2009, USDA data show. On average, each cow produced 1,814 pounds of milk in April. That’s down 1.9 percent from 1,849 in March, which was the second-highest ever, after the record of 1,869 in May 2010.
On May 11, the USDA said production this year will jump to an all-time high of 195.4 billion pounds (88.6 million metric tons), up from last year’s record of 192.8 billion pounds. Output will continue to increase into 2012 to 198.7 billion, the department said. The U.S. is the world’s biggest fluid-milk producer after India.
Class III milk futures reached a 32-month high of $19.65 per 100 pounds on March 11 on the Chicago Mercantile Exchange. Futures for May delivery gained 1 cent today to close at $16.43.
Demand is growing as the economy recovers, said Michael Marsh, the chief executive officer of Western United Dairymen, a Modesto, California-based trade group that represents about 1,000 dairy farmers in the state.
“We are starting to see some uptick,” Marsh said. “When consumers have additional cash, they can afford to spend those dollars at restaurants. Then, of course, more dairy products are consumed.”
Rising export demand for dairy products including dry-milk powder and butter from buyers in Asia and Mexico also is fueling the jumps in prices and production, said Bob Cropp, an economist at the University of Wisconsin in Madison who has been studying the industry since 1966.
Dairy-product shipments rose 38 percent to 1.609 million tons in 2010 from a year earlier, and exports climbed 37 percent in the first three months of 2011 to 430,519 tons, according to the USDA. Cheese exports last year jumped 62 percent to 38,794 tons, while butter exports doubled to 45,072 tons, data show.
The export gain “is keeping those prices very strong and that benefits the farmers,” Cropp said. “However, it does raise retail prices to the consumer,” which has hurt domestic sales of fluid milk, he said.
Whole milk at the supermarket averaged $3.597 a gallon (3.8 liters) in April, up 15 percent from a year earlier, according to the Bureau of Labor Statistics. Average retail cheddar-cheese prices rose 2.7 percent to $5.204 a pound last month, the highest since at least January 1984, government statistics show.
While prices rose, there are signs that higher costs may slow demand. U.S. sales of fluid-milk products fell in February from the same month in 2010, USDA data show. Sales of reduced-fat milk, or 2 percent, fell 2.9 percent in February 2011 from a year earlier, government data show.
Still, grocers and restaurants are passing along higher costs to customers. Bentonville, Arkansas-based Wal-Mart, the world’s largest retailer, has raised prices on some grocery items, particularly dairy and meat, Chief Financial Officer Charles Holley said on a call with reporters yesterday. Seattle-based Starbucks, the world’s largest coffee-shop operator, said last month that full-year profit will be down 22 cents because of higher fuel and dairy prices.
“Dairy is up,” Starbucks’ Chief Financial Officer Troy Alstead said during a telephone interview last month. “Ongoing exposure and just the inflationary impact in those commodities will pressure us further,” he said.
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