Asian Demand for Milk Shakes Up Market; U.S. Milk Exports to Asia Are on the Rise

Asian Demand for Milk Shakes Up Market

U.S. Milk Exports to Asia Are on the Rise.

KELSEY GEE

March 9, 2014 6:23 p.m. ET

Asia’s growing thirst for milk is spilling over into the U.S. market, pushing up prices for consumers and pressuring profits for some food makers.

U.S. exports of milk powder and other dairy products to China, Indonesia and Vietnam have surged in the past year, as drought curbed production in rival New Zealand, historically a big dairy supplier to Asia.

The record-setting exports are boosting incomes for American dairy farmers and sending milk futures soaring.

But the price jump is squeezing some dairy processors, including Dean Foods Co.DF -0.07% , the largest U.S. milk processor by sales, that are caught between higher ingredients costs and still-tepid U.S. consumer demand for milk.

“The business of moving product overseas has exploded over the past couple of years,” said Ronald K. O’Brien II, a strategist and dairy trader for Interfood Inc., a unit of Netherlands-based dairy distributor Interfood BV. “The majority of end users have been buying hand to mouth in complete and utter shock of these prices.”

U.S. retail milk prices rose 1.5% in January from a year earlier, federal data show, and the government estimates prices for all dairy products will climb as much as 3.5% this year. Consumers paid $3.552 a gallon for fresh whole milk in January, the highest in 13 months.

Class III milk futures, the benchmark contract at the Chicago Mercantile Exchange, rose to a record $23.21 per hundred pounds last month and are up 22% this year. The front-month Class III contract rose 0.05 cent to $22.65 per hundred pounds on Friday.

“What we’ve seen in futures over the last two months is the sharpest upward move I’ve ever seen,” said Eric Meyer, an analyst with Chicago brokerage High Ground Trading, who has been following the $1.8 billion milk-futures market since 2001. “This one caught a lot of people off guard.”

U.S. dairy exports grew by 19% by volume last year, according to the U.S. Dairy Export Council, as American companies shipped record amounts of milk powder, cheese and lactose, which is used in infant formulas and bakery products. Rising prices mean the value of those exports surged even higher, jumping 31% to $6.7 billion.

Demand for dairy products in China and other Asian countries has risen rapidly for years, due to growing populations and changing tastes.

Chinese purchases of foreign milk powder have grown especially fast—averaging 33% annually for nonfat dry milk since a 2008 scandal in which domestically produced milk tainted with an industrial chemical killed six children and sickened about 300,000.

Total dairy-product sales to China, including milk powder, soared even faster last year, by 70% to $706 million, largely because drought in New Zealand and adverse weather in Europe and South America reduced output from those regions.

The export demand has resulted in tighter U.S. milk supplies, raising the prices that U.S. farmers can fetch for the key ingredient in everything from cottage cheese to ice cream.

“Every drop of milk we can squeeze out right now is profitable,” said Skip Hardie, a dairy farmer in Lansing, N.Y. “Everyone’s a lot happier when there’s a 20% increase in their paychecks.”

The average price for milk paid to U.S. dairy farmers in February reached a record 24.7 cents a pound, up 27% from a year earlier, according to the U.S. Department of Agriculture.

U.S. consumer demand for cheese, yogurt and some other dairy products has been strong. But per-capita milk consumption in the U.S. has been falling for decades—partly reflecting sharp competition from flavored waters, juices and other beverages—and shows few signs of improving.

That creates a dilemma for purveyors such as Dean Foods because it can’t easily pass along higher costs without risking a decline in sales. The company last month blamed rising raw-milk costs for a sharp fourth-quarter loss.

Chief Executive Officer Gregg Tanner said on an earnings call that rising export demand isn’t new, but “its magnitude and intensity have been underestimated.”

“Prices have definitely been creeping up,” said Mara Van Nostrand, a stay-at-home mom in Houston whose family of five goes through two gallons of skim milk a week. She said she tries “to buy the store-brand label” to save money.

Some smaller dairy processors face headwinds as well. Al Bekkum, who owns Nordic Creamery in Westby, Wis., said he has been trying to develop new artisanal cheeses, such as sweet buttermilk ricotta, to offset rising costs for some of the cream used to make the company’s specialty butters.

“We’re trying to get more money back out of the products we buy, so we don’t have to increase the price of our butter,” Mr. Bekkum said.

Analysts and industry executives said milk prices could start to ease later this year amid forecasts for higher production in the U.S. and other large dairy exporters including New Zealand and Australia.

Global milk production in the five major export markets in the world, including the U.S., is forecast to rise 2% this year to about 608 billion pounds, according to the U.S. Department of Agriculture.

Output in the U.S.—the third-largest dairy exporter—is expected to rise 4.5 billion pounds, or 2%, from last year.

Prolonged drought in California—the biggest U.S. dairy-producing state—also could play a role as farmers grapple with barren pastures.

Geoff Vandenheuval, a 53-year-old dairy farmer in Chino, Calif., said he is reluctant to expand his herd after a “disastrous” period of high feed prices and relatively low milk prices in recent years.

“I’m interested in getting out of debt, not putting any more money at risk,” said Mr. Vandenheuval, who milks about 750 cows, down from 1,400 several years ago.