Milk Prices Rally to Highest Since 2007 as Exports Rise

Prices for nonfat-dry milk, the biggest U.S. dairy export, rose to a six-year high on surging 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 today, 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.

The gains for the dry good signal higher costs for the milk consumers drink as demand increases, according to Bob Cropp, an economist at the University of Wisconsin in Madison. Global dairy prices tracked by the United Nations surged 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.

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

Prices for nonfat-dry milk climbed 27 percent this year, according to government data. Futures of class III milk, used to make cheese, rose 2.3 percent on the Chicago Mercantile Exchange, while the Standard & Poor’s GSCI Spot Index of 24 commodities fell 2.6 percent. The MSCI All-Country World Index of equities gained 16 percent. The Bloomberg U.S. Dollar Index of 10 major trading partners gained 2.7 percent.

Farm Legislation

An extension of U.S. agriculture subsidies to late January was rebuffed yesterday 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. Agriculture Secretary Tom Vilsack has not offered a time line as to when the USDA would actually begin implementing the 1949 law, which would require a period of federal rule-making.

On the CME, milk futures for December delivery fell 0.3 percent to close at $19.03 per 100 pounds. The price is heading for a second straight quarterly gain.

U.S. Exports

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.

Fonterra Cooperative Group Ltd., 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 today.

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 Bill Brooks, a dairy economist INTL FCStone Inc. in Kansas City, Missouri. 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.

Before it's here, it's on the Bloomberg Terminal.