Milk Futures Reach Record as U.S. Exports Increase Amid Drought

January 22, 2014 04:47 AM

Jan. 21 -- Milk futures in Chicago jumped to the highest on record, signaling higher costs for consumers, as exports surge and a record drought threatens output in California, the nation’s top producer.

Shipments of dry-milk ingredients, cheese and butterfat jumped 17 percent to 1.76 million metric tons in the 11 months through November, the latest data from the U.S. Dairy Export Council show. California had its driest year ever in 2013, threatening to slow output per cow, according to INTL FCStone Inc. Futures jumped 16 percent this year, the biggest gain among 64 commodities tracked by Bloomberg. Cheese, up 12 percent, is the second-best performer.

Global dairy prices tracked by the United Nations climbed 28 percent last year, compared with a 3.4 percent decline in overall food costs. The gains in cheese and milk may boost expenses for Darden Restaurants Inc., the operator of Red Lobster and Olive Garden chains, and General Mills Inc., the maker of Yoplait yogurt.

"You still have demand out there for dairy products in general without any immediate increase in milk production on the horizon," Robert Chesler, a Chicago-based vice president in the foods division of FCStone, said in a telephone interview. "Weather-wise, you can look at the West Coast drought situation. There’s certainly long-term concerns there."

Milk futures for February delivery rose 2.2 percent to settle at $22.40 per 100 pounds at 1:11 p.m. on the Chicago Mercantile Exchange. Prices reached $22.46, the highest for the most-active contract since trading began in January 1996. The commodity gained for the 10th straight session, marking the longest winning streak since March 2012.

Extreme Weather

Dairy prices are climbing at a time when many agriculture commodities are tumbling after farmers increased grain production, sending corn and wheat into bear markets. Global food costs tracked by the U.N. are 14 percent below the record set in February 2011. Farmland in the U.S., the world’s biggest corn grower, is recovering from last year’s drought, the most- severe since the 1930s.

California Governor Jerry Brown declared a state of emergency last week after three years of little rain. The drought threatens the state’s $44.7 billion agricultural industry. Extreme weather events have created "massive risk" to the global agriculture industry, according to Peter Kendall, president of the U.K. National Farmers Union, who raises 1,600 hectares (3,953 acres) of grain crops in Bedfordshire, England.

"The cows will get less water, and that will reduce the production per cow, potentially," Chesler of FCStone said. "It will impact quality of the feed and forage. That will have implications for milk."

Retail Prices

The tight supplies and rising demand signal increased retail prices. U.S. consumers may pay as much as 3.5 percent more for dairy this year, according to the latest government projections.

Darden, which also operates LongHorn Steakhouse, sees "slightly higher" dairy costs on a year-over-year basis through the fourth quarter of fiscal 2014, C. Bradford Richmond, the chief financial officer, said on an earnings call with analysts Dec. 19.

The dairy markets "have been highly inflationary," Ian Friendly, the chief operating officer for Minneapolis-based General Mills, said on a Dec. 18 earnings call with analysts.

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