World milk shortage doubles price

It is hard work, 12 hours a day, but already it looks as though it has paid off: Just four years later, the farm is worth more than twice what he paid for it. Prices for dairy farms in New Zealand are soaring along with dairy incomes, thanks to a global milk boom.

"It feels really good," Irwin said. "It feels like we’re going to be earning and be rewarded the way we should."

Driven by a combination of climate change, trade policies and competition for cattle feed from biofuel producers, global milk prices have doubled over the past two years. In parts of the United States, milk is more expensive than gasoline. There are reports of cows being stolen from Wisconsin dairy farms.

"There’s a world shortage of milk," said Philip Goode, manager of international policy at Dairy Australia in Canberra.

It turns out that, along with zippy cars and flat-panel TVs, milk is the mark of new money, a significant source of protein that factors into much of any affluent person’s diet. Milk goes into infant formulas, chocolates, ice cream and cheese. Most baked goods contain butter, and coffee chains like Starbucks sell more milk than coffee.

Just meeting that demand, according to Alex Duncan, an economist at Fonterra, the dominant dairy cooperative in New Zealand and the world’s largest dairy-exporting company, will require the addition each year of the equivalent of New Zealand’s entire annual milk output.

That is a lot of milk. New Zealand is one of the world’s largest milk producers, according to IFCN Dairy Research Center in Germany, but the largest exporter of dairy products. Some dairy economists doubt the world’s heifers are up to the task, and say there is a possibility that the shortage of milk now being seen in parts of the world will spread.

Others say there are plenty of places where more milk can be produced if the price is right. One thing they agree on is that milk prices are likely to stay high and rise even higher.

"No one forecast this rapid shortage of milk," said Torsten Hemme, head of the IFCN center.

This is not good if you are in the market for milk. Pizza parlors and ice cream vendors are raising their prices. Starbucks has raised the price of its drinks. Raising the price of its candy bars didn’t stop milk prices from pushing Hershey’s profit down 96 percent in its latest financial year. Milk is also weighing on profits at Cadbury Schweppes and at Kraft Foods’ cheese unit.

What is unusual, and somewhat confusing, about the milk boom compared with other booming commodities is that milk is not like oil: You can’t stick it in barrels and stockpile it. It goes sour. Even in powder form, the most commoditized version, milk has a shelf life. As a result, only about 7 percent of all the milk produced globally is traded across borders. The rest is consumed in domestic markets, which are protected by geography and just as often by tariffs or subsidies.

Big buyers like chocolate makers and grocery stores buy their milk under long-term contracts, and so can smooth out sudden spikes or dips in prices. Thus, the full impact of the global shortage varies from country to country, and not all consumers are yet suffering the full impact.

But because of the local nature of the market, there is very little spare capacity. In the past, the world could always count on the United States and Europe to fill shortages by exporting some of their subsidized stockpiles of cheese, butter and milk powder. But the United States has drawn down its butter mountain and other stockpiles; the same is true of the European Union, which started cutting dairy subsidies in 1993 and will be finished this year. Rising dairy demand in the United States and among the EU’s new members, moreover, is sucking up supplies. As a result, said Hemme, "This storage capacity is empty now."

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