Food companies face rising dairy prices

Warm weather, export demand and health-conscious consumers spur a butter and cheese rally.

By Jonathan Berr Jun 28, 2012 11:24AM

Image: Rising food prices (© George Doyle/Stockbyte/Getty Images)Food companies are facing rising prices on dairy products, a cost that may eventually depress their profits, even if some of it will be passed on to consumers.

 

Wholesale prices on the Chicago Mercantile Exchange for butter are currently around $1.52 per pound after jumping 16% from May's level of $1.35. Barrel cheddar spot prices soared about 13% to $1.67 per pound during the same period.


The reasons are many, including unseasonably warm weather, rising exports and the surging popularity of butter, which some people argue is more healthful than substitutes such as margarine.

 

"Dairy prices have rebounded quite dramatically over the past six weeks," said Dave Kurzawski, a dairy and commodity analyst at FCStone Advisory. "It should be a beacon to food companies and investors alike." Kurzawski added, "Overall, you are in the foothills of a bigger price raise for dairy going into 2013."

 

Part of the problem is that the dairy business has been depressed for years and few new dairies have been built as farmers have found row crops such as corn to be more profitable, according to Kurzawski.

 

If this trend holds, it could prove problematic for a host of companies such as Kraft (KFT), whose products include Oreo cookies and macaroni and cheese; Hershey (HSY), the iconic chocolate maker; and Papa John's International (PZZA), which operates about 4,000 restaurants in 50 countries. With the exception of Kraft, shares of these companies are up by double-digit percentages this year. Investors, it appears, aren't factoring in rising prices yet.

 

Food companies and other large buyers of commodities hedge their exposure to price increases through the futures market, so the impact may not be felt immediately. Moreover, prices  for dairy products are down from where they were a year ago because there was an unexpected surge in domestic milk production, according to Peter Vitaliano, an economist at the American Butter Instititute and the National Milk Producers Federation.   


"Last summer, the wholesale price of cheese was well over $2," he said.  "We're getting back to a  little more realistic break-even prices for both cheese and butter. Earlier, they were not sustainable. . . . Right now, we don't look like we are going back to 2011 high levels, but we are going to higher than where we had been over the past two or three months." 


Perhaps the biggest irony in this story is how butter is emerging as a "health food." As Advertising Age noted recently, market researchers expect butter volumes to jump 10% from 2011 to 2016, while sales of margarine will continue to fall.

13Comments
Jun 28, 2012 1:43PM
avatar

FACT:  In California the average efficient dairy farm is receiving significantly less than the cost

of producing milk at the farm.  Dairies are receiving a loss of $3 to $4 dollars per cow per day.

A 1000 cow dairy farm is currently receiving $3000 to $4000 less per day than their ACTUAL

expenses. No profit just significant daily losses.  There are efficient family farms that have been

in business for one, two, and three generations over 60 years and they are being foreclosed on

because the prices dictated are not even close to breaking even.  Being a hard working good

stuart is not enough and the people in the middle between the farms and the final consumers

are posting record profits.  Don't complain about milk going up because it is not even close to

a break even number yet.  Complain about the middle men who want ALL the money.  I hope

we can keep our farms before the banks foreclose.  This great way of life is not what I want to

pass on to my children any more.

Jun 28, 2012 1:22PM
avatar
I believe that the practice of false science blasting healthy food is rampant in the US. Example butter, eggs, coconut oil and we could also use some true science to correctly and truthfully evaluate saturated fat. All the while our "caring" (painful humor) FDA approves High Fructose Corn Syrup. The FDA needs to be re-structured with an elected official as director, who will hopefully insulate the agency from the influence of "Big Business" lobbyist jobs, investments and election money. For once let the people have a voice in how the country is governed using true science and not insider influences.
Jun 28, 2012 1:21PM
avatar

 Why not?  Everything else in food seems to be on the rise, might as well join in.  I don't want to hear about the price of corn/feed  going up ...when a portion of it is going for gasoline.  (How about cobs to replace toilet paper? )  Cutting out cheese and some Dairy Products that we eat to much of might help prices stabilize as the consumers demand is less.

Jun 28, 2012 1:19PM
avatar
Here in south central NE, a generic store brand package of 4 sticks of butter costs around $4. Margarine only costs a little over $1 for the same brand and package type. I don't know much about the health pros/cons of each, but ever tried baking with margarine? Yeah... don't. Unless you don't mind if your cookies turn out thin and hard, that is. And, frosting made with margarine? That stuff will melt at room temperature, especially during the summer. I'd start making my own butter, but unfortunately the cost of cream here can run a bit high, too. At least the cost of milk is still reasonable... for now. 
Jun 28, 2012 12:53PM
avatar
As if prices weren't high enough.....take a cut on your profits and give us people a friggin break....some goes for the oil companies. 


Jun 28, 2012 1:17PM
avatar
Maybe the Oil Companies could CHIP-IN!
Jun 28, 2012 2:12PM
avatar
all the dairy farms the government bought out in the late 80's is now coming back to haunt the american consumers. what the government thought was a good idea turned out to be what usually happens when the government is involved with anything... A MESS!!!
Jun 28, 2012 1:11PM
avatar

Farmers, dairy farmers, creameries, and co-operatives need a price level to pay for their operations and to make a reasonable profit, they cannot continue to operate at a loss for long periods of time.  Costs for feed, equipment and fuel are high.  The consumer needs to pay their fair price for milk, cheese, and other dairy products. 

 

My message to poster "bim31p": In many cases there are no profits to cut so "us people can get a friggin break".  Dairy prices cannot be equated to oil companies either.  Oil is international,dairy is local or state price controlled.  As a consumer I do not object to dairy prices at the supermarket and do not think they are too high.

Jun 28, 2012 4:09PM
avatar
Nothing like subsidized ethanol to help things along. Remember the corn grown for ethanol is not food corn, it is some other kind of corn. Cows, chickens, and hogs cannot eat corn grown for ethanol because they said so. Think of all the other crops that are not grown because of a crop that requires the use of more petroleum to grow than it saves after taking your tax money. Cool huh?
Jun 28, 2012 2:53PM
avatar

Here is an article I read in Nov of 2011,it was written by Michele Simon. Just copy the title and drop in Google. Got blocked when I tried to link it.

 

foodsafetynews. Dairy-industry-making-a-killing-by-killing-cows

 

 It spells out clearly how Milk prices are being forced up. It's a very good read and is packed with details.

 

There is also the name of a law firm in Seattle that is suing the Dairy industry for price fixing.

 

 

Jun 28, 2012 5:03PM
avatar

I'm dont know a lot about farming as a business and am not going to pretend to. It chaps my rear just the same that farmers have to make a "reasonable" profit. They are the ones providing our food and they have to keep profits at a "reasonable" level?! On the flipside, the oil companies can have profits in the BILLIONS of dollars!!! Where are the regulations on the prices for that??

Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

123
123 rated 1
262
262 rated 2
480
480 rated 3
651
651 rated 4
649
649 rated 5
629
629 rated 6
616
616 rated 7
496
496 rated 8
346
346 rated 9
111
111 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
EXCEXELON CORPORATION9
TAT&T Inc9
VZVERIZON COMMUNICATIONS8
CTLCENTURYLINK Inc8
AAPLAPPLE Inc10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.