Dairy farmers have failed to keep pace with a 3% 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 US, 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 US department of agriculture (USDA) 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% in six months to a record $1.58 a pound on May 4 at the Chicago Mercantile Exchange, seven times higher than the five-year average. During the first five months last year, prices fell 14%. Fluid milk futures on the exchange advanced to a record $19.15 on May 3 and have risen 63% in the past year. The commodity traded at $18.75 on Friday. Hershey Co, the biggest US 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% of the cost of each pizza.

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

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

Source: Financial Express