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Why The Increase In Protein Prices?
Contributed by Erik
Thursday, 06 September 2007
Last Updated Wednesday, 31 October 2007
In the last year, we have seen protein prices slowly climb and climb. The question has surely come up of why? Why all of
a sudden has the price risen so sharply across the board? Well, the bottom line, more than anything, is because most of
your protein powder is derived from milk, and milk prices have sky-rockted as of late. This article should shed some light
on some questions we all have had regarding the increases.
Not Your Everyday 9 to 5
Dairy farming is hard work. 12 hours a day, every day, but for many dairy farmers it looks as though their hard work is
paying off.
Many dairy farms across the world, not just the United States and New Zealand, are worth more than twice what many
originally paid for it, if not more. Prices for dairy farms everywhere are soaring along with dairy incomes, thanks to a
global milk boom.
The Increasing Demand
Driven by a combination of climate change, trade policies and competition for cattle feed from biofuel producers, global
milk prices have doubled over the last two years. In parts of the United States, milk is more expensive than gasoline.
There are even reports of cows being stolen from Wisconsin dairy farms.
"There’s a world shortage of milk,” said Philip Goode, manager of international policy at Dairy Australia in
Canberra.
But some of the the biggest forces driving up milk prices can be directly linked to a few glaring occurences: a roaring
global economy and incredibly enough, lower cow numbers and higher feed costs Rising incomes in emerging
economies from China and India to Latin America and the Middle East are lifting millions of people out of poverty and into
the middle class.
It turns out that, along with new, flashy cars and high definition, flat panel TVs, milk is now one of the signs of new
money. A high source of protein that factors into much of any person’s diet, rich or poor. Milk goes into infant
formulas, chocolate, ice cream and cheese. Most baked goods contain butter, and coffee chains like Starbucks sell more
milk than coffee.
Fullfilling The Needs
Just meeting that demand, said Alex Duncan, an economist at Fonterra, the dominant dairy cooperative in New Zealand
and one of the world’s largest dairy-exporting companies, will require the addition each year of the equivalent of
New Zealand’s entire annual milk output.
That is a whole lot of milk! New Zealand is one of the world’s largest milk producers, according to IFCN Dairy
Research Center in Germany, but it is the largest exporter of dairy products. Some dairy economists even wonder if the
world’s cows are up to the task and say there is a possibility that the shortage of milk now being seen in parts of
the world will spread.
Others say there are plenty of places where more milk can be produced if the price is right. One thing they agree on is
that milk prices are likely to stay high and rise even higher.
"No one forecast this rapid shortage of milk,” said Torsten Hemme, head of the IFCN center.
Forecasting The Possible Fallout
This is not good if you are in the market for milk. Pizza parlors and ice cream vendors are raising their prices. Starbucks
has raised the price of its drinks. Milk is also weighing on profits at Cadbury Schweppes and at Kraft Foods’
cheese unit.
Other industries are obviously also suffering from this sudden increase in milk prices. The supplement industry also relies
heavily on milk due to all the protein powder they manufacture. Across the board, companies that manufacture protein
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powder or protein drinks have had to raise their prices by 20-30% just to keep up with the rising milk prices!
What is unusual, and somewhat confusing, about the milk boom compared with other booming commodities is that milk
is not like oil: You cannot stick it in barrels and you surely cannot stockpile it. It will go sour within a relatively short period
of time.
Even in powder form, the most commoditized version, milk has a shelf life. As a result, only about 7 percent of all the milk
produced globally is traded across borders. The rest is consumed in domestic markets, which are protected by
geography and just as often by tariffs or subsidies.
Big buyers like chocolate makers and grocery stores buy their milk under long-term contracts and so can smooth out
sudden spikes or dips in prices. Thus, the full effect of the global shortage varies from country to country, and not all
consumers are yet suffering the full impact.
But because of the local nature of the market, there is little spare capacity. In the past, the world could always count on
the United States and Europe to fill shortages by exporting some of their subsidized stockpiles of cheese, butter and milk
powder. But the United States has drawn down its butter mountain and other stockpiles; the same is true of the
European Union, which started cutting dairy subsidies back in 1993 and will finish this year.
Rising dairy demand in the United States and among the European Union’s new members, moreover, is draining
supplies. As a result, Mr. Hemme said, “This storage capacity is empty now.”
The Trickle Effect
At the same time, rising demand for biofuels is pushing up the price of corn and other grains, which is what farmers in the
United States, Europe, Canada and Japan feed their cows instead of grass. Rising feed costs help to push milk prices
even higher.
Production is starting to grow in emerging markets like China, but demand there is growing even faster. The average
person in China now consumes more than six gallons of milk a year, up from more than two gallons in 2000, according to
IFCN. So while China is now one of the world’s top milk producers, it is also the world’s largest milk
importer.
Experts say the growing demand for milk will have to be met in countries like China and Argentina as higher prices lead
to greater investment in lifting milk yields.
Some see the United States as another main source of milk supplies. International prices have now risen above the
subsidized price of milk there, making it profitable for American dairies to export their milk. “There’s a real
opportunity for the U.S. to export without government support or subsidies,” Mr. Goode said.
Mr. Hemme at IFCN estimates that both the American Midwest and Europe could multiply their milk production. But it
would take one or two years and require using more costly corn and grain. So even if milk supplies keep up with demand,
the price will stay high.
"Even when prices start easing back, we don’t expect them to go back to where they were,” said Hayley
Moynihan, a dairy analyst at Rabobank in New Zealand. “The cost of production and ongoing demand is going to
see prices eventually settle at higher levels than they did in the past.”
So what does all this mean for those who need to fulfill their protein needs with protein powders? Well, it does mean that
everyone might still have to pay more now than what they used to for their protein, but if you ration your intake to only
what you really need for your dietary and workout needs, then that should help absorb the blow that your wallet might
feel.
References:
Arnold, Wayne, (2007) A Thirst For Milk Bred By New Wealth Sends Prices Soaring. The New York Times.
Sparks Companies, Gale Group, (2004) Many Factors Behind Increase In Milk Prices