Supply Chain News Bites - Only from SCDigest

-August 12, 2007


Procurement News: Milk and Milk-Related Products Have Become Part of Agflation Syndrome, as Supply Chain Costs Soar for Food Producers


Foodstuffs Market Goes Global, Giving Suppliers More Clout; Chinese are Eating More Cheese Too


By SCDigest Editorial Staff


Milk and milk-derivative products have long been commodities famous for low market prices and a balance of power that strongly favored buyers. Now, they have joined the growing mix of agricultural products that are seeing astonishing gains in market prices across the globe.

This trend, which many now refer to as “Agflation,” has been manifested as prices for farm products such as corn, corn syrup, and wheat reached record levels in 2007 (See Commodity Buyers under Pressure on Many Fronts, as Economy now Confronts “Agflation”) Now, you can add milk to the list. In the past 12 months, prices for milk and related products, such as powdered whey, have also soared in the U.S. and Europe. On the Chicago Mercantile Exchange, the price for milk futures has soared about 70 percent in the last 12 months.  Prices for milk and related products in most of Europe are up almost 50% in 2007. There is an old joke about a “mountain of extra butter” in Europe that no one talks about now.

The result has been significant pressure on food manufacturers, for which these agricultural commodities represent a substantial portion of total cost and which have either been slow or unable to pass on the full cost increases to consumers. In the U.S., for example, Papa Johns Pizza was just the latest to warn that rising prices for cheese may hurt its profits.

What’s happening? In part, it’s a globalization of the food supply market. While in many product areas, the opening of supply markets to global sources reduces buyers costs, in agricultural commodities in many cases, it has freed producers from restrictive selling models that limited true market forces.

Similarly, the price for these agricultural commodities is increasingly driven by global futures markets, where, as noted, milk and other prices are rising substantially, at times perhaps in ways that don’t perfectly reflect the true supply-demand balance. Traders are betting that supply will be tight in the future, creating price increases on the spot market.

Finally, as with oil prices, the upward spike in milk prices is linked in part to growing demand from China. Imports of dairy-related products have surged, as per capita consumption has more than doubled since 2000, a level of increase that Chinese domestic production has not been able to match.

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