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 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, has risen 60 percent in six months to a record $1.58 a pound May 4 on the Chicago Mercantile Exchange, seven times higher than the five- year average.

During the first five months last year, prices fell 14 percent. Fluid milk futures on the exchange advanced to a record $19.15 on May 3 and have risen 63 percent in the past year.

Hershey Co., the biggest U.S. candy maker, and Dean Foods Co., the nation's largest milk processor, said this month that higher dairy costs will hinder profit growth. Domino's Pizza Inc. said it will spend more on cheese, which accounts for 30 percent of the cost of each pizza.

Feeding the Poor

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.

``Programs to feed the poor will face difficulties,'' said Merritt Cluff, an economist with the United Nations Food and Agriculture Organization in Rome, which monitors food security worldwide. ``They'll be able to buy less, or they'd have to buy alternative sources such as wheat, but prices for wheat and maize have also risen.''

Mexico, the top importer of U.S. dairy products and a buyer of almost $1.4 billion of foreign supply in 2005, cut purchases of milk powder by 28 percent last year and may buy less again this year because of higher prices, a U.S. Department of Agriculture report showed in November. Mexico already has capped tortilla prices to keep inflation in check.

Source: Bloomberg