Food companies face rising dairy prices
Warm weather, export demand and health-conscious consumers spur a butter and cheese rally.
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.
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.
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.
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.
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.
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.
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??
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After Tuesday's rally, expect a big raid no matter the news. That's probably the safest way to play it ahead of the Fed.
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