Forget worries about $4 gas ... now it’s $4 milk

updated 6:03 p.m. ET May 30, 2007

CHAMPAIGN, Ill. - Liz Kooy loves sharp cheddar cheese and is willing to pay almost any price for it.

“Ten dollars a brick, I’d still buy it” and cut back on other purchases, the 36-year-old social worker laughed as she browsed the dairy aisle in a grocery store near downtown Chicago on Wednesday.

She might want to start looking for places to cut back.

Dairy market forecasters are warning that consumers can expect a sharp increase in dairy prices this summer. By June, the milk futures market predicts, the price paid to farmers will have increased 50 percent this year — driven by higher costs of transporting milk to market and increased demand for corn to produce ethanol.

U.S. retail milk prices have increased about 3 percent, or roughly a dime a gallon, this year, according to the U.S. Department of Agriculture.

But University of Illinois dairy specialist Michael Hutjens forecasts further increases of up to 40 cents a gallon for milk over the next few months, and up to 60 cents for a pound of cheese.

That would drive the cost of a gallon of whole milk around the country to an average of $3.78, based on the USDA’s monthly survey of milk prices in 30 metro areas.

NBC video Ethanol demand causes rising food prices May 27: Corn is more expensive these days because of ethanol demand. NBC’s Scott Cohn reports. Nightly News

Prices in the last survey, earlier this month, ranged from $2.76 a gallon in Dallas to $3.86 in Chicago and $4.09 in New Orleans, where the dairy industry has struggled to bounce back from Hurricane Katrina.

Hutjens and others said higher gasoline prices have increased the costs of moving milk from farm to market, and corn — the primary feed for dairy cattle — is being gobbled up by producers of the fuel-additive ethanol. The USDA projects that 3.2 billion bushels of this year’s corn crop will be used to make ethanol, a 52 percent increase over 2006.

Ethanol has increased the average American's grocery bill $47 since July, and Iowa State University study concluded.

“There is no free lunch,” Hutjens said. “That corn then has to come away from that dedicated resource.”

Chris Galen, a spokesman for the National Milk Producers Federation, pointed to another factor: Global demand for milk, he said, has grown in the past few years, primarily in the new Asian economic powers.

“China of course is a big story,” he said. “They’re consuming more (milk protein); they’re using more dairy ingredients in animal feed.”

In years past, that demand might have been met by Australia and New Zealand, he said. But drought in Australia and the limits of New Zealand’s dairy industry have pushed China and its neighbors to buy American.

Hutjens said the biggest dairy price spikes are likely to come later this summer in the areas farthest from the Midwest corn and grain fields that feed most of the country’s dairy cattle.

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