Demand is up, and so are prices

The USDA estimates that milk production will be up slightly to 183 billion pounds in 2007, but that is less than a 1 percent increase over 2006. Tighter supplies, coupled with strong demand and rising feed prices, are going to push up wholesale prices for most dairy products this year.

Over the past couple of years, the top dairy-producing states (Wisconsin, California, New York, Idaho and Pennsylvania) have been getting more milk from fewer cows. However, the gradual slowing in the rate of herd expansion since 2005 is going to affect stocks this year. Jerry Dryer, president of Dairy & Food Market Analyst in Delray, Florida, blames high energy costs and last summer's unruly weather conditions for potential price increases. "Alfalfa hay is in short supply as a result, and that's mainly what the cows eat," he says.

Roger Hoskin, an agricultural economist with the USDA who specializes in the dairy industry, cites the impact of demand factors as well. "Fluid milk consumption was on a steady decline but recently, it has started going up," he says. "And cheese, the largest single component for milk use, has seen a relentless climb. The country is on a cheese-eating binge."

Trade issues are going to confuse economic predictions for the next few years, Hoskin adds. Exports are driving the industry more than ever before, and imports of authentic European cheeses and niche dairy products are in demand by certain foodservice customers. However, imported cheeses account for only 5 percent of the market, a figure that hasn't changed in ten years, notes Dryer. "Plus, the EU is not subsidizing cheese exports and the dollar is weak against the Euro, so the United States is where the cheese action is," he adds.

That's especially true in the specialty cheese arena, which is expanding at a faster rate. Nevertheless, the price of milk has less of an impact on this sector. "Specialty cheeses are much more value-added and already on the expensive side. They don't have the same flexibility to go up and down with the price of milk," Dryer explains.