US & Canada

How Chinese babies and Mid-East pizza tip US markets

Cows stand in a field Image copyright Thinkstock

US milk and butter prices have reached record levels in recent months. A confluence of global factors, from droughts in New Zealand to a growing demand for pizza in the Middle East, are costing US dairy devotees.

This year in the US, milk futures leapt 26% and butter prices 62%. The rising cost of milk can affect thousands of products, including yoghurt, ice cream and even cheeseburgers.

The cause of the price surge is far from straightforward, however. The world is currently engaged in a delicate dairy dance, with the whims of one nation causing significant changes for all the others.

It's the butterfly effect, but with butter.

Here are five international factors influencing US milk prices:

Global dairy deregulation

Until about a decade ago, dairy markets were largely insular, with US companies making products mostly for domestic consumption.

Back then, says Alan Levitt, spokesman for the US Dairy Export Council, US and European governments stored excess dairy products in good times and sold them in lean times, effectively shielding the market from a great deal of volatility.

As a result, there was usually an oversupply of milk products on the market, Levitt says.

But in recent years governments quit the dairy business - largely due to costs - and dairy regulation decreased, driving a new incentive and ability to trade with other nations.

As a result, the dairy market tends now toward undersupply.

This makes prices much more erratic. When there's a glut of dairy on the market, prices go down. When there's a shortage, prices go way up.

"Dairy is a global market now," Levitt says. "It's very fluid... everything triggers something else."

China's children

China has traditionally accounted for 15-20% of world dairy imports, says Levitt.

But from December 2013 to February 2014, Chinese demand grew to 20-25% of all global dairy imports, with much of the supply coming from the US and New Zealand.

Image copyright Thinkstock

The clamour for imported milk products in China has been growing since 2008, when dangerously high levels of the industrial chemical melamine were found in powdered baby milk.

"The demand for infant formula has gone sky high," says dairy market analyst Matt Gould.

"There's a premium for foreign dairy products," he adds. "People would rather have a product that says 'Made in New Zealand' or 'Made in the USA'."

That premium - even a world away - raises the price of dairy on the international market, and allows US suppliers to command more for the same product at home.

New Zealand's lack of rain

New Zealand is the world's largest dairy exporter, accounting for nearly one-third of the global dairy trade.

Many of the nation's cows graze in fields, and a big drought in 2013 caused national milk production to plummet nearly 30%.

Image copyright Thinkstock

With less dairy on the market, international prices for milk spiked.

The US started exporting more dairy, capturing more international market share but pushing up domestic prices.

It's not all bad news for New Zealand, though. Traditionally, when the price of dairy goes up, farmers expand operations and produce more milk, thus lowering prices down the line.

Thanks to the investments the country's farmers made in 2013, "New Zealand had incredible milk production expansion in the first half of this year", Levitt says.

The increase in supply could eventually lead to cheaper prices in the US, but not for several months.

Pizza in the Middle East

A young, newly urbanised population in the Middle East is demanding more dairy imports. But why?

"The expansion of fast food," Levitt says.

US franchises including KFC, Ihop, Subway, The Cheesecake Factory, Jamba Juice and Papa John's Pizza have all staked claims in the Middle East, with more chains looking to follow.

As with demand for baby formula in China, the surge in the popularity of pizza and burgers in the Middle East has driven up dairy consumption, raising prices for American consumers.

Russian sanctions

But relief may be ahead.

In August, Russia implemented a one-year import ban on dairy and other food products from the European Union, US and other Western nations in retaliation for economic sanctions over Russia's role in the Ukraine crisis.

Image copyright AFP
Image caption Russian President Vladimir Putin instituted a year-long import ban following strict sanctions

That removed an estimated $6.6bn (£4bn) in annual dairy trade from the global market. In 2013, the EU alone exported $3bn of dairy to Russia, of which cheese accounted for more than one-third.

That's a lot of orphaned cheese, Gould says.

"In Europe, they have a lot of product they need to find homes for because Russia was a huge piece of their dairy exports."

In response, the European Commission has announced it will provide financial support to the dairy industry, subsidising private storage of cheese, skimmed milk powder and butter until they can be sold at a later date.

The glut of dairy products has weakened the international market and caused prices in Europe to drop.

But it will take a little while to see those changes reflected in American supermarkets.

Levitt predicts Americans will start to see some financial relief from high dairy costs by March 2015.

"We're going to be entering a period where world prices are lower for a while because we have excess now," he says.

"And if the world prices are lower, then ultimately US prices become lower."

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