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Milk shortage

This is a page from the original version of Pagan Vigil. There are some formatting differences. Originally published at

Feed prices driven higher by ethanol subsidies and the reduced "government surpluses" of milk and milk products means that the price of milk is going up

Another case of what happens when government messes with the free market.

Remember about a month ago when I posted a link to a story that told how the price of corn and other grains was rising because of ethanol subsides? You can find it here, What happens when green means taking food out of mouths?

Now it seems we may be seeing the secondary effects. Emphasis added.

Milk prices worldwide are rising at the fastest rate ever and won't be falling anytime soon because of growing demand in China and Latin America and dwindling government supplies.

Dairy farmers have failed to keep pace with a 3 percent 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 U.S., 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 U.S. Department of Agriculture 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 percent in six months to a record $1.58 a pound May 4 on the Chicago Mercantile Exchange, 74 percent higher than the five- year average. During the first five months last year, prices fell 14 percent.

So a large part of what we are seeing here is the market adjusting to the true price of milk. Milk prices had been kept artificially low by subsidies. But applying government pressure to one part of the chain just means that the entire distribution network bears the costs. That means that prices don't actually reflect supply and demand. Sure enough, that is exactly what happened. Once again, emphasis added.

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 U.S., the largest exporter of milk powder, and the EU, the largest exporter of cheese.

U.S. inventories of butter, cheese and dry milk peaked at more than 2.7 billion pounds in 1983. The government that year spent $2.5 billion on surplus dairy products to support prices and farmer income. Today, the U.S. has no surplus after selling the 27 million pounds it held in 2005, USDA data show.

European warehouses, which had 200,000 tons of milk powder in 2003, are empty, according to Erhard Richarts, dairy expert with the Bonn-based market and price reporting agency ZMP. Skim milk powder exports from Europe fell to 84,000 tons last year from 194,000 tons in 2005, he said.

But here is the kicker. Emphasis added.

Milk production also may drop because the cost of corn, the primary source of livestock feed, has advanced 55 percent in the past year to $3.6925 a bushel on the Chicago Board of Trade. Rising demand for grain-based ethanol has increased the price of corn feed and may prevent dairy farmers from expanding their cow herds, agricultural analysts say.

"Producers are a still a little scared of the high feed costs,'' said Joel Karlin, commodity sales coordinator for Western Milling in Goshen, California.

Feed accounts for half the cost of producing 100 pounds of milk in the U.S. The value of a pound of milk was equal to 2.54 pounds of dairy feed in April, up from 2.48 a year earlier, the USDA said. The ratio needs to be at 3 pounds for several months before milk producers will expand herds, Karlin said.

All that demand for alternative fuels means higher prices and less food for the poor. What's more, this is directly caused by government interference.

Hat tip Sunni Marvillosa.

Posted: Tue - May 15, 2007 at 03:13 PM

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