What's happening in the dairy industry?

June has been a busy month with dairy products and strategies in the news. Consumers have seen milk prices increase by one dollar a gallon with increases in cheese, butter, and ice cream. The increase in milk prices in the store is partially related to higher milk prices in dairy farmers (represent half of the store shelf increase).

Dairy processors (such as Kraft, Deans, and Starbucks) are also feeling the impact of higher dairy input costs that are being passed along to consumers. But, independent and local processors are adding marketing pressure as their prices remain lower than national name-branded dairy products. Some pizza companies are adding a “topping” change for cheese and the amount added could decline.

Dairy farmers will receive record-high milk prices in July, 2007, receiving over $22 per one hundred pounds (cwt) for their milk (this represents an increase of 8 cents a pound compared to winter 2007 prices with a gallon of milk containing 8.6 pounds of milk). Milk production remains tight as more cows have been sold, heat stress is lower milk yield, and world demands for dairy products remain high.  Dairy managers face high hay prices (up 40% due to drought and the spring Easter freeze), higher fuel and energy costs, and high corn prices due to a lack of rain and continued growth in ethanol plant numbers.

Consumers can expect the price of milk to increase 30 to 40 cents a gallon, 40 to 60 cents per pound for cheese, and 80 cents to $1.20  per pound for butter throughout 2007, said a University of Illinois Extension dairy specialist.

"This is due to increases in the prices of corn and feed for dairy cattle, shifting to ethanol production, energy costs, and a shortage of dairy products in the world market," said Mike Hutjens. "These will increase farm prices by four to six cents per pound of milk."

Hutjens' comments came as he reviewed consumer use of dairy products with the approach of June Dairy Month.

The average consumption of all dairy products in the United States in 2005 (the latest year for which statistics are available) was 33 percent as fluid milk, 40 percent as cheese, 13 percent as butter, and 8 percent as frozen dairy product.

Consumption patterns for the average American in 2005 included 32 pounds of cheese, 8.6 pounds of yogurt, 27 pounds of fat-free milk, 81 pounds of reduced-fat milk, 57 pounds of whole milk, 4.4 pounds of sour cream/dips, 14.5 pounds of flavored milk, 26 pounds of ice cream, and 2.6 pounds of cottage cheese.

"Losers among dairy products in 2005 were yogurt, down 6.6 percent; whole milk, down 4.4 percent; and cottage cheese, down 3.7 percent," said Hutjens.

"In 2005, the average consumer spent $371 on dairy products out of a total of $5,781 in food purchases--$3,347 for food at home and $2,434 for food away from home."

Hispanics invest the most in dairy products at $425 per person/per capita, he added. The Northeast region of the United States invests the most at $417 per person.

"School milk consumption was up 6 percent and could increase as more school districts remove soda as a beverage choice," Hutjens said.

Organic milk makes up 1.9 percent of dairy product consumption.

Romania is the world's leader in milk consumption at 365 pounds per person compared to 204 pounds per person in the United States. New Zealanders consume 14 pounds of butter per person compared to 4.6 pounds for U.S. consumers.

"However, the United States leads in cheese consumption at 32 pounds of cheese per person with the European Union second at 29 pounds," he said.

The United States exported $1.5 billion in dairy products last year, up 11 percent from the pervious year, to Mexico, Canada, and Japan as whey proteins and milk powder. The United States imported $2.6 billion in dairy products last year, up 12 percent from the previous year, primarily as specialty cheese and butter.

Higher feed and fuel prices will probably take half the $4 to $6 per hundredweight price increase Illinois dairy farmers can expect for their product in 2007, said a University of Illinois Extension dairy specialist.

"2007 appears to be an economically positive year for Illinois dairy farmers with milk prices up $4 to $6 per hundredweight compared to 2006 when milk was below breakeven prices," said Mike Hutjens as he reviewed the state's dairy industry on the eve of June Dairy Month.

"In addition to higher feed and fuel prices, Illinois producers will face other challenges this year. These include the impact of heat stress this summer on dairy cattle with the potential to reduce milk yield and fertility; culling of cows, forage production and quality; impact of less BST use; and changes in world supply and demand."

Even as ethanol production continues to drive up the cost of feed, Hutjens said it has a potential benefit for dairy producers.

"Distillers grain, a byproduct of ethanol production, continues to be an economically available feed resource," he said. "Distillers grains have increased in price and will change in composition as new ethanol plants extract oil from the products. Farmers should be feeding 10 to 15 percent of their rations as corn distillers grain."

Illinois continues to trail the nation's leaders in average milk yield per cow.

"The average Illinois dairy cow produced 19,204 pounds of milk compared to the U.S. average of 19,756," he said. "Colorado cows took the lead at 23,155 pounds per cow."

Illinois has 1,105 dairy farms with the average herd size 94 cows. The U.S. average herd size is 147 and the top state is New Mexico with 1,929 cows per farm. Illinois produced 1.98 billion pounds of U.S. total production of 181 billion pounds.

"Our state has 15 herds over 500 cows producing 15 percent of Illinois's total milk yield," said Hutjens. "In the United Sates, there are 3,143 herds with over 500 cows that are producing 51 percent of our total milk supply."

Hutjens also outlined some other challenges ahead for Illinois and U.S. dairy producers.

"There will be different milk sources in the market that may confuse consumers," he said. "Among these are conventional milk (includes fat free, 1 and 2 percent milk, whole milk at 3.25 percent fat), flavored milk, and milk for lactose intolerant consumers. These products will average $2.50 to $3 per gallon.

"Organic milk accounts for 1.9 percent of the market but the price is 2.5 times higher at $7 per gallon. Soy-based milk is three times higher in price at $8 per gallon and is made from genetically-modified soybeans in most casts. Grass-based milk comes from cows fed primarily in pasture. And, milk from cows not injected with BST (recombinant bovine somatotrophin or rBST) is appearing on some grocery shelves."