CATEGORY:SPECIAL REPORT ---------------------------- INSIDE GRENADA FRIDAY May 18,2007 Milk prices worldwide are rising at the fastest rate ever and will not be falling anytime soon because demand in China and Latin America is growing and government supplies are dwindling. Dairy farmers have failed to keep pace with a 3 percent increase in annual milk consumption, according to Rabobank Groep in the Netherlands, the world's biggest agricultural lender. Reduced subsidies eliminated milk surpluses in Europe and slowed production growth in the United States, government data show. The rally started last year after Australia reduced exports, because of its worst drought in a century. "Over the next several months we're going to see some pretty strong prices on all milk," said Larry Salathe, an economist and dairy expert at the U.S. Department of Agriculture in Washington. The production needed to bring prices down "takes at least several months, usually a year to two years, to come." The price of skim-milk powder, the benchmark for world trade, has risen 60 percent in six months to a record $1.58 a pound May 4 on the Chicago Mercantile Exchange, seven times its five-year average. During the first five months last year, prices fell 14 percent. Fluid milk futures on the exchange advanced to $19.15 May 3, which was a record, and have risen 63 percent in the past year. The commodity traded at $18.90 on Monday. The spike in prices will be felt around the world. Hershey, the biggest candy maker in the United States, and Dean Foods, the largest milk processor in the United States, said this month that higher dairy costs would hinder profit growth. Domino's Pizza said it would spend more for cheese, which accounts for 30 percent of the cost of each pizza. Government aid officials say that food programs for children in Indonesia, Mexico, the Philippines and Algeria are likely to be scaled back because of the rising costs. About 80 percent of the world's exported milk powder is sold to developing countries. "Programs to feed the poor will face difficulties," said Merritt Cluff, an economist with the United Nations Food and Agriculture Organization in Rome, which monitors food security worldwide. "They'll be able to buy less, or they'd have to buy alternative sources, such as wheat, but prices for wheat and maize have also risen." Mexico, the top importer of U.S. dairy products and a buyer of almost $1.4 billion worth of foreign supply in 2005, cut purchases of milk powder by 28 percent last year and may buy less again this year because of higher prices, a U.S. Department of Agriculture report showed in November. Raghuveera Reddy, agriculture minister for Andhra Pradesh, an east Indian state of more than 75 million people, said rising milk costs would "have an impact" on the consumers in the country. The rally this year is different from increases in previous years because government surpluses are no longer available in dairy-producing countries like the United States, the largest exporter of milk powder, and the European Union, the largest exporter of cheese. U.S. inventories of butter, cheese and dry milk peaked at more than 2.7 billion pounds, or 1.2 billion kilograms, in 1983. The U.S. government that year spent $2.5 billion on surplus dairy products to support prices and farmers' income. Today, the United States has no surplus after selling the 27 million pounds it held in 2005, the U.S. Department of Agriculture said. European warehouses are empty, according to Erhard Richarts, dairy expert with the market and price reporting agency ZMP, based in Bonn. Skim milk powder exports from Europe fell to 84,000 tons last year from 194,000 tons in 2005, he said. The world consumes about 500 million gallons, or 1.9 billion liters, of milk a day, enough to fill five supertankers, based on estimates by Rabobank. The 14 percent jump in milk demand during the past seven years outpaced the 13 percent rise in oil use, according to estimates from the International Energy Agency in Paris. The annual increase in consumption since 2001 was 3.4 billion gallons of milk on average, or about what is produced each year by New Zealand. Milk exports have helped make the New Zealand currency the best performer against the U.S. dollar during the past year among the 16 most active markets. Uruguay and the Netherlands also are benefiting from dairy sales. While the 2.5 billion people in China and India are drinking more milk than ever, they still are far behind the United States. Per-capita demand in the United States averages 25 ounces, or .7 liter, a day, almost four times the average in India and 19 times the average in China. Article written by Gavin Evans and Danielle Rossingh for Bloomberg News