Demand in China helps milk prices set records

PARIS — Barring a global mad cow crisis, we'll probably never run out of it. But milk has one thing in common with oil: It's trading at record highs.

Reasons include growing appetites for dairy foods in China and elsewhere in Asia, where chains such as McDonald's and Starbucks are introducing unfamiliar taste buds to cheeseburgers and lattes. Other factors are rising costs for animal feed, shrinking European production and a long-standing drought in Australia and New Zealand, the world's largest milk-exporting region.

Paying more for milk is causing an uproar in Germany, where families consider providing children with an affordable glass of milk a fundamental right. It is also a concern for consumers in the United States and elsewhere in Europe.

Milk prices hit a record last month in the United States, where consumers paid an average of $3.80 a gallon compared to $3.29 in January, according to the U.S. Department of Agriculture. The USDA forecasts that prices will remain high throughout the year.

Prices are likely to remain high worldwide until dairy farmers add more cows or shift production to powders, which are more easily traded than the liquid stuff.

International dairy prices increased 46 percent between November 2006 and April 2007, with milk powder prices increasing even faster, according to the Food and Agriculture Organization.

Companies such as candy giant Hershey Co. that use dairy for their products are feeling the pinch. But in many parts of the globe, dairy farmers are cheering.

"Global demand has been extraordinary for American dairy products, but global supplies of dairy products have been exceptionally tight," said Michael Marsh, head of the Western United Dairyman trade group in California, the top dairy-producing U.S. state. "From the American dairy farmer's perspective, you have almost a perfect storm."

In China milk consumption has soared along with rising incomes, a massive expansion of the dairy industry and the increasing familiarity with, and taste for, non-native foods among young urbanites.

Pizza Hut sells its cheese-laden pies throughout China, and milk, yogurt and individually packaged cheese slices can be found in small, local supermarket chains. Foreign-owned stores such as France's Carrefour, Germany's Metro and America's Wal-Mart cater to slightly more sophisticated tastes, selling crumbly blue cheeses, wheels of gouda and red-waxed balls of Edam.

Products from Chinese dairy giant Mengniu even carry the label of being the official milk of the Chinese space program. Its drinks promise to "fortify the Chinese people," with packaging showing a space-suited boy clutching a glass of creamy goodness.

China's growing love of dairy is a far cry from two decades ago, when the country was just opening up to foreign products and availability was limited to milk, yogurt and, on rare occasions, butter. The Dairy Association of China estimates that consumption will rise 15-20 percent annually in coming years.

Premier Wen Jiabao has said that his dream is for each Chinese child to consume a pint per day. He is boosting production to try to keep up with demand, but the world's most populous nation remains a net importer of dairy products.

The boom in biofuels is pushing up corn prices and making animal feed more expensive. Farmers have responded by raising milk prices.

Corn futures indicate that the price of corn will remain high this year, according to the Washington-based International Dairy Foods Association. Prices also have risen for soybeans, another feed crop, it said.

The impact on the price of a carton of milk differs across the globe because dairy markets vary significantly from region to region, skewed by domestic and trade policies and other factors such as geography.

Governments in the United States, Canada, the European Union and Japan have a range of policies, including tariffs and quotas, that insulate their milk from international prices, according to the Food and Agriculture Organization. These systems are under strain, as high rewards in the globalized market are inspiring milk producers to challenge the old practices.

In Germany, where milk prices are set annually after negotiations between producers and powerful retailers, those retailers have been holding prices down by almost 15 percent since 2002. Since July they've been paying producers an extra 5 to 7 cents a quart after the producers threatened to take their milk elsewhere.