More Moola for Your Next Gallon of Milk

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Woman picking carton of milk from refridgerator in supermarket USA
Chris Howes/Wild Places Photography/Alamy
"Milk -- it does a body good -- if you can afford it."

As taglines go, this probably isn't going to drive quite as many consumers to the supermarket as the dairy industry's original version did. But it's pretty accurate. For the past two months running, American consumers have gotten socked with record-high prices for milk.

'Milk' Isn't as Simple as It Sounds

To understand why, you first need to understand at least four kinds of "milk" are sold in America:
  • Class I milk is what you ordinarily think of -- the ice-cold, refreshing, Grade A stuff that comes in gallons, for drinking, baking or pouring over your cereal.
  • Class II milk is used to manufacture such soft dairy products, such as yogurt.
  • Class III milk gets turned into hard cheeses, such as cheddar. Its producers are paid based on the amount of milk protein, milk fat and other solids contained in the Class III milk. As a rule, the price is set in relation to the wholesale price of cheddar cheese, as reported by the National Agricultural Statistics Survey.
  • Class IV is nonfat dry milk -- powdered milk.
As a rule, milk producers consider Class III and Class IV milks the most important. Class I milk's price is based on the prices for either Class III or Class IV -- whichever costs more. Class II milk is set at the price of Class IV, plus a premium.

Now here's why all of the above is important: In February, Class III milk hit an all-time high price of $23.35 per hundredweight (100 pounds). This was a result of that federal cheese price quotes also hitting record highs. In March, Class III milk's price dipped only 2 cents, to $23.33 per hundredweight. At the same time, every other class of milk hit new record highs.

But we repeat: Why?

High Demand for American Cheese

According to dairy industry website DairyReporter.com, it all comes down to cheese -- and who's buying it. Cheese prices determine Class III milk prices, and Class III milk prices determine the cost of the Class I milk you buy at the grocery store. American cheese inventories plunged earlier this year -- despite record levels of production -- because cheese exports also hit a record high.

All told, 32,118 metric tons of the stuff left U.S. borders in January 2014 (about 7.4 percent of U.S. production), traveling abroad to satisfy the surging demands of up-and-coming consumer economies in South Korea (which imported 36 percent more American cheese in January 2014 than it did in January 2013), Mexico (48 percent more), and China (up 100 percent) -- and higher levels of export to Canada and Australia besides. (Among developed economies, Australia in particular seems to be going on a cheese bender, importing 142 percent more in January 2014 than it did the previous year.) Adding financial insult to pocketbook injury, American consumers didn't even get to enjoy the benefit of the infinitesimal, two-cent drop in Class III milk prices last month -- because no sooner had Class III "cheese-milk" prices fell than Class IV "powdered milk" prices surged to a new high.

The reason? You guessed it. Exports of powdered milk are also surging. And you're getting stuck with the bill.

How Much Is This Going to Cost You?

Dairy analysts estimate that retail prices of milk gallons at the supermarket could surge 60 cents this year -- perhaps hitting an average of $4.10.

Meanwhile, the U.S. Department of Agriculture is warning that as a consequence of the wholly unrelated drought now afflicting California (America's breadbasket for many agricultural products), consumer food prices overall are set to rise past the 1.4 percent inflation rate set in 2013. Estimates for 2014 are 2.5 percent to as much as 3.5 percent.

Relative to the cost of milk, that's a bargain.

Motley Fool contributor Rich Smith did not wear a milk mustache during the writing of this column. Nor does he have a financial interest in any dairy stocks.



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57 Comments

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mkmmse

"Dairy analysts estimate that retail prices of milk gallons at the supermarket could surge 60 cents this year -- perhaps hitting an average of $4.10"

The grocery stores around here hit that price last month. I just paid $4.25 a gallon yesterday and I know the price will be climbing again. :P

April 29 2014 at 8:38 PM Report abuse +1 rate up rate down Reply
subistar

I hae to say that this article did not address the number one cause of higher milk prices: HAY PRICES! Cows eat hay and the alfalfa and mixed grass hay prices are through the roof because of Chinese exporting a high percentage of our hay production for their newly founded dairy industry and the drought conditions have made California hay almost impossible to produce. Prices have skyrocketed over the last 5 years from $6 and $7 a bale to $20+ a bale today! Hello! We're feeding China's cows and paying for it with higher prices for our dairy products! The horse industry is suffering as well with many horses being abadoned or sold off for slaughter because the owners can no longer afford to feed them. The Chinese are paying more for ton than our hay companies can and they are buying up fields of hay for current and future cuttings on contracts for several years production. So if we let them continue then we only have our own government and their export regs to blame and we have to shoulder the bulk of that blame because we put those fools in office in the first place.

April 29 2014 at 12:47 PM Report abuse +2 rate up rate down Reply
1 reply to subistar's comment
thomashollman19

VOTE THE BASTARDS OUT KEEP SPREDING THE WORD

April 29 2014 at 3:52 PM Report abuse +2 rate up rate down Reply
SweetfeetBaby

"Beefed" dairy cows are the source of much of our hamburger, so the higher milk prices also keep dairy farmers from beefing any productive cows, which drives up the price of hamburger. Can't tell you how much these rising prices, due largely to our government printing and spending money it doesn't have, helps out our poor.
Product exports actually help our overall economy. Printing money, not so much.
Yet the American standard of living remains the world's highest, and continues to widen the gap over socialists nations around the world.
Once again we discover there is no free lunch.
You can look it all up.

April 29 2014 at 12:25 PM Report abuse -2 rate up rate down Reply
1 reply to SweetfeetBaby's comment
thomashollman19

OUR GOVERMENT PRINTING MONEY HURTS THE POOR BECAUSE IT HURTS THE DOLLAR WHICH IN TURN RUINS THE ECONOMY FOR THE POOR AND THE RICH PUT THE POOR TO WORK STOP REWARDING THE NON PRODUCTIVEITY

April 29 2014 at 12:35 PM Report abuse rate up rate down Reply
thomashollman19

MAYBE IF THE GOVERMENT HANDED OUT CHEESE INSTEAD OF CREDIT CARDS [QUEST] THE BASTARDS WOULD'NT BE ABLE TO TRADE IT FOR DRUGS AS EASY THROW IN A SACK OF POTATOES THEY CAN PLANT THE EYES

April 29 2014 at 12:23 PM Report abuse +1 rate up rate down Reply
mdaskievig

what does Califonia's drought have to do with milk or food prices. California is not the dairy or beef capitol of the USA. Yes california does produce a lot of fruit or vegitables and wine , but the drought was not the entire state either. Compared to the farms in the rest of the United States, What percent does that part of Californias play in the total food production in the USA? What percentage of loss was it actually ? What was the % drop from the previous year or avg of past 3 years ? They fudge the number to make the amirican public pay what they want. When they have good years do we see the prices go down , hell no .EX: Watermellon 2 yrs ago 3.50 to 3.99, last year 4.50-4.99, this year price is 5.99 at grocery store.

April 29 2014 at 12:09 PM Report abuse rate up rate down Reply
2 replies to mdaskievig's comment
thomashollman19

THE GOVERMENT IS PRINTING MONEY EVERYDAY TO MAKE THIS FAILED ADMINISTRATION LOOK LIKE IT'S HOLDING IT'S OWN THIS DEVALUES ANY MONEY YOU ARE HOLDING SPEND IT IT WILL BE WORTH LESS TOMARROW ALSO

April 29 2014 at 12:16 PM Report abuse rate up rate down Reply
subistar

California is one of the biggest dairy producers ever! Or was before the dairy preserve in Chino became a housing tract. I live 5 minutes from what used to be the largest dairy producing area in the US up until 5 years ago when the original ban on development ran out and the land was sold off for development. The hay fields are now being plowed under and $500000 homes buoilt on them and the central Californai hay fields lay fallow because of the drought and the Imperial Valley hay fields are sold to the Chinese Exporters for their cattle farms for the next 5 years so our hay prices have gone from $7 a bale to $20 in 5 years. COWS EAT HAY! There's your price increses in a nutshell and it affects all of the country not just California! Trybeing a horse owner inthis ecnomy and you'll see what is happening.

April 29 2014 at 12:54 PM Report abuse rate up rate down Reply
bleyzzer

tell me something...WHAT ISN'T costing MORE these days??!! Milk, hamburger, cereals, pork, chickenin ...the list is flippin' ENDLESS!!! Too bad our paychecks aren't ggoing up in line with the prices of everything, and I don't mean just froceries either!!! A person doesn't even want to get out of beds most mornings anymore-costs too much to do so!!

April 29 2014 at 11:45 AM Report abuse +3 rate up rate down Reply
1 reply to bleyzzer's comment
subistar

Milk, hamburger, cereals, pork, chicken all have a common thread my friend. The Chinese are exporting record amounts of grain and hay to feed their burdgeoning cattle industry. Cereal comes from grains. Chickens and pigs eat grin. Cows (source of dairy products and meat) eat grain and hay! Hay prices have tripled in 5 years. There are less fields because of developers building overpriced housing on them and many are laying fallow in California and oter states due to the drought. With gasoline at over $4 a gallon we expect yet another increase soon in hay prices and when that happens you will see a lot of cattle and horses being dumped into the slaughter pens. So get ready for another price jump soon. It's all interconnected which is something that most people who don't live on a farm never realize.

April 29 2014 at 1:02 PM Report abuse +1 rate up rate down Reply
savannahswithgod

One word after these, 'Greed'!

April 29 2014 at 11:35 AM Report abuse +1 rate up rate down Reply
1 reply to savannahswithgod's comment
subistar

The only greed involved is from the greedy politicians and the Chinese who don't have to fight to own the world because they are rapidly buying it! Read my comments above and you'll see why the prices are skyrocketing. The farmers are losing their businesses because they can't make ends meet. Most of them live below the poverty level now just to try and keep their animals fed. So when you start with the greed accusations toss them in the right direction: WASHINGTON D.C.!!!!!!

April 29 2014 at 1:05 PM Report abuse +1 rate up rate down Reply
chiefcross

This is not about exports. We have about 15% of the dairy's now that we had 10-15 years ago. Our all knowing government bought out the milk allotment from most dairy farms and forced the farmers that sold the allotment to sell their cows. Same with tobacco. Reason cigs. and other tobacco products are so expensive. Government bought the allotment from the farmers and they can no longer grow tobacco if they sold the allotment. Not as much competition for milk and tobacco products. I know. My tobacco allotment was sold to the government. Thanks

April 29 2014 at 11:13 AM Report abuse +1 rate up rate down Reply
thomashollman19

Soy milk at thedollar store is $1 boycott cow milk and the price will come down

April 29 2014 at 10:38 AM Report abuse rate up rate down Reply
Merrio Fryman

i made a mistake in my previous comment, its not 750,000 dollars, its
750,000,000.00 dollars to that little country.

April 29 2014 at 10:30 AM Report abuse rate up rate down Reply