By Mike Caggeso
China's ever-growing middle class has driven up the average price of milk around the world, upsetting everyday grocery shoppers but also providing deft investors with opportunities to profit.
The newfound demand from the Far East has also raised the incomes of dairy farmers and changed the way milk - once a domestically exclusive product - is manufactured, shipped and sold.
"Consumption is shifting from fluid milk, generally produced for local markets, toward manufactured products, such as cheese and dairy-based ingredients produced for national and global markets," said a U.S Department of Agriculture report released in September.
Those dairy-based manufactured ingredients include nonfat dry milk (up 30% in early 2007 in the U.S.) and dry whey ("more than twice as high as it ever was before the current run-up in prices"), which are turned into exportable products such as milk powder, cheese and butter. Right now in China, little things like hot chocolate mix and individually wrapped slices of cheese are appearing in grocery stores for the first time in smaller, inland cities.
The USDA also reported that milk's price is up 98% from last year, setting the highest price on record at $21.76 per 100 pounds of farm milk. Here in the United States, the average consumer price of a gallon of whole milk has risen from $3.29 in January to $3.87 in September.
And China's demand for milk is not about to abate. The price of milk is far from peaking, according to the "China Dairy Market Report," because China's dairy consumption per capita is still at a low level. Per capita consumption is now above six gallons a year - up from two gallons a year in 2,000.
[For a related report outlining profit plays in wheat and other agricultural commodities - which are also being driven skyward in price because of soaring demand from China and elsewhere in Asia - please click here.]
Yet, liquid milk is expected to grow 15% each year for the next five years. That blistering growth will cut into the growth of other dairy products, causing volatile price fluctuations, the report says.
China's demand has spilled into rural Mongolia, too, where entrepreneurial farmers are gobbling up the country's sprawling farmlands, Time reports. There, farmers are offered more money for milk and beef than anything that could be grown from the ground.
Another factor driving up the price of dairy is the exploding corn market. The price of cattle feed, which accounts for between 30% and 55% of the total costs for dairy farms, has risen dramatically. That's because corn (a primary feed ingredient) and farmland in general have been diverted to feed the growing demand for ethanol production. Like China's growing dairy demand, the ethanol market is far from peaking, putting more long-term pressure on the dairy industry.
Who's Feeling the Pain?
But before you complain about milk prices, be thankful you aren't in Australia, where continuing drought and recent flash floods have crippled the dairy industry, pushing up the wholesale price of skimmed milk by 60% in six months.
Or the U.K., where shoppers have seen the price of cream tick 23% higher in a year. The U.K. can also expect a big jump in the price of cheese this summer on top of the 30% hike in the past year.
In mainland Europe, the European Union stopped giving subsidies to its dairy farmers and insteadfrom India, Commodity Online reports. Its shift from exporter to importer was hinted at last year, when the EU's share of the international dairy trade slumped 29%.
Less milk production in Europe will drive up its dairy prices. And though India farmers are rolling in the profits, exporting milk to Europe will squeeze local supply and drive up prices. With India's middle-class growth soaring behind China, it won't be long until the price hike makes more headlines.
Who's Going to Profit from Milk?
In the U.S. there's been a national shift from small to large dairy farms, enabling milk to be produced with fewer resources, and increasing annual production by 3.7%, buffering prices for consumers.
"Those who can produce these products in the most cost-productive way are going to benefit," said Scott Brown, program director of livestock and dairy at the Food and Agricultural Policy Research Institute at the University of Missouri.
Story continues below...
Right now, New Zealand and Australia are the world's most efficient dairy producers, Brown said. And their proximity to the booming Asia economies is a huge bonus.
Efficiency is quickly becoming the modus operandi of U.S. dairy farmers. Larger dairy farms not only hedge us against rising costs, but they also give us more ability to feed the rising global demand.
"Taking [another] perspective for a minute, we've seen prices increase to the point where producers across the world are seeing bottom lines that are much better in the last few years," Brown said.
However, sustaining growth in the dairy industry is a difficult and expensive task. Other industries can buy or build better machines and hire more workers to get better results the next day.
Dairy farmers, on the other hand, can't just make more cows. It takes years to expand a dairy operation. "Consumers around the globe are paying record prices, and that's likely going to continue for the next few months, at least," Brown said. "But there are incentives for producers to expand, but it's going to take a while."
Dairy farmers are milking the majority of the profits, but investors can too. Shares of Wimm-Bill-Dann Foods OJSC (NYSE:WBD), Russia's leading dairy and fruit juice producer, have rocketed 132% in the past year.
Two American companies are also positioned to feed China's need for dairy. Shares of Maryland-based Synutra International, Inc. (NASDAQ:SYUT) have moved a blistering 141% since the start of the year. Speculators might want to roll the dice on American Dairy, Inc. (NYSE:ADY), a small-cap company that's heavily invested in supplying China's dairy demands.
For the time being, stay away from Dean Foods Company (NYSE:DF). The dairy and soy producer has had a good run, but it recently cut 600 to 700 jobs and lowered its earnings forecast.
Related News and Story Links:
What's behind high milk prices? Look to China.
Selling Steak to China.
Money Morning Investment Analysis:
Jim Rogers Warns of Fallout From Fed Cuts; Says to Seek Profits in Commodities, Asian Currencies.
- Money Morning Investment Analysis:
Wheat's Forecasted Price Drop Highlights Profit Plays in Commodities.
Money Morning News Analysis: