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Paying More for a Gallon -- of Milk

THE NATION

April 30, 2004|Jerry Hirsch | Times Staff Writer

Shocked by the price of milk last week, Jose Batista joked that he should just buy a cow for his two children as he filled a shopping cart at a Food 4 Less in Hollywood.

Batista had better get the barn ready. Starting Saturday, the minimum retail price of milk, which has been climbing steadily this year, will take a big jump.

A gallon of whole milk will cost at least $2.90 -- 50% more than a year ago. And in major supermarkets, a gallon could command more than $4.

Dairy farm expert Michael Marsh blames what he calls the "pizza factor." The improving economy has apparently unleashed pent-up demand for pizza and other items dependent on cheese, and a surge in cheese buying by food processing companies and restaurants has sent the value of most dairy commodities soaring on the futures market. California's regulated milk prices are tied to the futures prices of those commodities, especially cheddar cheese and butter, traded in Chicago.

But there's more behind the fortification of milk prices. For starters, there's something of a dairy-cow deficit. Because droughts have made for poor grazing, many dairy farmers have balked at paying for extra feed and have instead sold some animals for slaughter, lured by record prices for beef, made popular recently by the high-protein diet craze.

What's more, the discovery last year of a case of mad cow disease in Canada closed off the U.S.' biggest source of replacement dairy cows, doubling the price of milk calves. And because of manufacturing glitches, there's a shortage of the genetically engineered growth hormone that enables cows to make more milk; that alone is expected to reduce the nation's total milk output by 2% to 3% this year.

Taken together, all these factors will trigger Saturday's milk-price hike. In Southern California, the minimum so-called farm-gate price for a gallon of whole milk a farmer sells to a processor will rise by 47 cents, jumping to $1.85 from April's $1.38, according to the California Department of Food and Agriculture.

In a one-of-a-kind system established in 1935, regulators at the agency set both the farm-gate and retail prices for milk, the latter after factoring in the estimated costs of processing and marketing. The system was created during the Depression to keep farmers solvent and ensure a steady, year-round supply of milk. (A federal system that operates in much of the rest of the country will push milk prices elsewhere to record levels too.)

Starting Saturday, the lowest lawful retail price in Southern California will be $2.90 for a gallon of whole milk, up 55 cents from April. As for 1% and 2% milk, a gallon of that will go for a minimum of $2.70. Because of minor differences in the costs of running dairy farms in the northern half of the state, prices there will be higher -- $2.93 for a gallon of whole milk.

Grocery stores can set prices even higher, of course; state regulators concern themselves only with the minimum. And if history is any predictor, experts say, a gallon could fetch as much as $4.50 starting Saturday, up from about $3.80 now.

"This is going to be a big deal for consumers," said Betsy Imholz, Western director for Consumers Union, publisher of Consumer Reports magazine.

The milk hike will come on top of other increases recently for basics such as eggs and paper products. Add milk to high-priced gasoline and it "makes everything more difficult," said Batista, whose family goes through 2 gallons of milk a week.

A spokesman for Ralphs, one of the state's largest grocery chains, declined to discuss its plans, saying only that it would remain "competitive with the marketplace." Executives with Albertsons, another large chain, declined to comment.

Since February, the state-set minimum retail price for whole milk has gone up 80 cents a gallon. That has prompted big milk drinkers like the Belmonte family of Hollywood, which typically goes through 4 gallons a week, to consider alternatives. "We'll have to switch to powder soon if the prices rise," Ana Gladys Belmonte said as she picked up 2 gallons for $5 at the Hollywood Food 4 Less.

For the $3.8-billion California dairy farming industry, though, the price rise is good news. Farmers are recovering from one of the worst slumps ever: After peaking five years ago at $1.73, California farm-gate prices bounced around and then crashed in early 2002.

The downturn was so bad that about 10% of the state's roughly 2,200 dairy farmers quit the business, said dairy expert Marsh, chief executive of Western United Dairymen, a Modesto-based trade group.

"In real terms, you would have to go back to World War II to see prices as low as the past couple of years," Marsh said.

For producers, the only downside to high prices is that they might damp demand.

"I am concerned with consumer response to this large an increase," said Ted DeGroot, president of Rockview Farms in Downey. "It could hurt milk consumption."

But for now, dairy farmers see things looking up. Geoffrey Vanden Heuvel of Chino figures he lost at least $300,000 in 2002 and 2003. Using his herd as collateral, he survived by getting his bank to lend him $800 to $900 for each of his 700 milk cows.

"I was just a few months away from having to decide what bills not to pay before the bleeding stopped," he said. "It was very scary."

Vanden Heuvel figures that prices will have to remain lofty for at least a year for him to get his debt down to about $350 a cow, which he considers manageable. The price slump "was just torture," he said. "If it got that bad once, it can get that way again."

Times staff writer Arlene Martinez contributed to this report.

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