Milk prices seen slipping in the fall

NEW YORK (CNNMoney.com) -- After a four-month surge that has seen the price per gallon exceed $4 in some communities, milk appears headed for a stabilizing period as feed costs settle and international demand plateaus.

Dairy analysts, while not yet forecasting more exact numbers, see whole milk prices retreating from national record highs of $3.73 a gallon in July and drifting towards the $3 range of a year ago.

Video More video German pockets hit by China's appetite for milk. CNN's Diana Magnay explains. Play video

The U.S. Department of Agriculture, in its survey of 30 cities spread across the country, reported an average price in August of $3.87 per gallon of whole milk, a 1.8 percent increase from July's $3.80. The USDA's average was 7 cents higher than the number reported by the U.S. Bureau of Labor Statistics, which records data from a broader sample.

Milk's price increase largely has been spurred by ethanol demand that has spiked the price of corn, which is used as feed for dairy cows. Another significant factor has been international demand for U.S. milk, which also has swelled due to supply shortages from major foreign exporters.

But Ken Bailey, who follows the dairy industry closely at Penn State University and through his Dairy Outlook Web site, said strong milk production this summer will play a factor in the leveling of milk prices. In fact, he said if production continues at such a robust level prices could fall significantly next year after steadying this year.

That's great news for consumers, who were slammed with $3 a gallon gas earlier this summer along with other rising food costs, as well as retailers who saw milk sales slide during the price gain.

In its 75 years of existence, Crescent Ridge Dairy has seen the highs and lows of milk prices. Mark Parrish, the third-generation owner of the Sharon, Mass.-based home delivery service, prefers when prices avoid significant fluctuations because that's when his customers tend to buy more.

Parrish says the dramatic 18 percent price increase since January hurt his family business, which bottles and distributes milk and other dairy products to more than 100 communities in the Boston area. He said some of his customers have substituted other less expensive drinks for milk since the price shot up.

"We're seeing a little downturn in overall milk sales and I attribute it to the cost," he said. "It's becoming that much more costly and consumers are aware of that. If you look at it compared to the price of oil and gasoline, milk is a very expensive product."

Parrish and others in the business are welcoming forecasts that milk will ease in the coming months.

Some cities, though, continue to see huge increases. Atlanta prices jumped 9.2 percent to $4.39 and New Orleans was at $4.42, up from July's $4.19.

High milk prices have spurred price surges throughout the food chain.

Last week, the J. M. Smucker Company (Charts) said higher commodity costs, particularly milk, had impacted earnings and could cause future price increases of its products, which include Jif peanut butter as well as Crisco, Pillsbury and Uncrustables products. Earlier this month, Kraft (Charts) and Starbucks Corp. (Charts, Fortune 500) both said earnings were hit by higher milk costs, though all three companies reported strong profits overall.

Farmers have benefited from the run-up in prices, so they would be the ones to suffer should international demand fall and prices hit a slump.

"The milk production growth that we're experiencing, as long as markets find a home for that, and I believe it will, we'll be OK," Bailey said. "Next year is a different story. We're already seeing [futures] prices level out and decline."

Christopher Galen, spokesman for the National Milk Producers Federation, also noted that production has increased and farmer's fortunes will depend on demand.

"At the farm level, production is going to respond to the high price levels we're seeing," Galen said. "So we're just hoping that demand stays strong both domestically and internationally."