A Thirst for Milk Bred by New Wealth Sends Prices Soaring Victoria Birkinshaw for The New York Times
Geoff Irwin at his dairy farm in New Zealand, worth double what it cost him in 2003. With milk prices high, “it feels like we’re going to be earning and be rewarded the way we should,” he said.
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Article Tools Sponsored By By WAYNE ARNOLD Published: September 4, 2007
HAMILTON, New Zealand — After years of saving, Geoff Irwin finally scraped up enough money to buy his parents’ dairy farm near here in 2003. Now his parents have retired to a house nearby and Mr. Irwin runs the farm with its 300 cows. Skip to next paragraph Enlarge This Image Victoria Birkinshaw for The New York Times
Cows in the milking shed of a farm in New Zealand. In many of the world’s emerging economies, milk is the mark of new money, a significant source of protein in an affluent person’s diet.
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 Mr. Irwin 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,” said Mr. Irwin, 45. “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 last 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.
But the biggest force driving up milk prices is the same one that has driven up prices for conventional commodities like iron ore and copper: a roaring global economy. Rising incomes in emerging economies from China and India to Latin America and the Middle East are lifting millions of people out of poverty and into the middle class.
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, chocolate, ice cream and cheese. Most baked goods contain butter, and coffee chains like Starbucks sell more milk than coffee.
Just meeting that demand, said Alex Duncan, an economist at Fonterra, the dominant dairy cooperative in New Zealand and one of the world’s largest dairy-exporting companies, 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 it is the largest exporter of dairy products. Some dairy economists doubt that the world’s cows 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. 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 cannot 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 effect 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 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 finish this year. Rising dairy demand in the United States and among the European Union’s new members, moreover, is draining supplies. As a result, Mr. Hemme said, “This storage capacity is empty now.”
At the same time, rising demand for biofuels is pushing up the price of corn and other grains, which is what farmers in the United States, Europe, Canada and Japan feed their cows instead of grass. Rising feed costs help to push milk prices even higher.
Production is growing in emerging markets like China, but demand there is growing even faster. The average person in China now consumes more than six gallons of milk a year, up from more than two gallons in 2000, according to IFCN. So while China is now one of the world’s top milk producers, it is also the world’s largest milk importer.
Experts say the growing demand for milk will have to be met in countries like China and Argentina as higher prices lead to greater investment in lifting milk yields.
Some see the United States as another main source of milk supplies. International prices have now risen above the subsidized price of milk there, making it profitable for American dairies to export their milk. “There’s a real opportunity for the U.S. to export without government support or subsidies,” Mr. Goode said.
Mr. Hemme at IFCN estimates that both the American Midwest and Europe could multiply their milk production. But it would take one or two years and require using more costly corn and grain. So even if milk supplies keep up with demand, the price will stay high.
“Even when prices start easing back, we don’t expect them to go back to where they were,” said Hayley Moynihan, a dairy analyst at Rabobank in New Zealand. “The cost of production and ongoing demand is going to see prices eventually settle at higher levels than they did in the past.”
