Holy cow! Consumers get a milk break

Retail milk prices are tipped to grow more slowly in 2008 due to an expanding milk cow population combined with a projected increase in average milk output per cow.

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NEW YORK (CNNMoney.com) -- For Americans already grappling with higher food prices, at least one big component of their burgeoning grocery bill - milk - could see a little relief in 2008.

The U.S. Department of Agriculture says milk prices won't come close to the 12% surge in 2007. A 1.1% increase in the cow population and 1.7% growth in the average output per cow are expected to help keep wholesale prices under control this year.

"As supply increases, farm and wholesale milk prices should decline," said Ephraim Liebtag, economist with the USDA's Economic Research Service.

And, if big drops in wholesale milk prices stick in the coming months, then retail prices for milk could level off or "even decrease," he said.

The USDA expects milk production to increase 2.7% in 2008, faster than last year's 2.1% growth in 2007.

That increase should also help moderate retail prices for other dairy products such as butter, cheese and ice cream, Liebtag said.

Liebtag anticipates a 3% rise in overall dairy product prices this year, which would still be a slower rate of increase versus last year's 7.5% hike.

That could give a little bit of a break to consumers who are expected to pay 3% to 4% more this year for food that they either buy at the store on in restaurants. That's on top of a 4% increase in prices for all foods last year, according to government reports.

Economists blame rising energy and commodities costs for inflating production costs and pushing up grocery prices..

Still, given that dairy purchases account for about 12% of the average monthly household spending on groceries, consumers will likely welcome any savings on milk.

"You also have to remember that milk doesn't have too many substitutes. Just like gas, you have to buy it for the family," Liebtag said.

Although money spent on food accounts for a modest 10% of the households' average monthly disposable income, a sharp rise in the cost of groceries can significantly impact lower-income families.

"These households feel the pinch more quickly. They either have to cut back, eat out less or trade down to less expensive food," said Liebtag.

But John Norris, managing director with Oakworth Capital Bank, isn't entirely convinced by the USDA's dairy price forecast.

Norris, who closely tracks retail food prices nationwide, believes that a 2.7% increase in milk supply won't shift the domestic supply curve enough to impact retail prices in the short term.

That's because any uptick in supply will be partially offset by increasing foreign demand, especially in China and other developing countries, for dairy products such as cheese, Norris said.

So producers with excess milk supply would prefer to maintain their wholesale prices by siphoning off the additional capacity overseas instead of cutting prices for the domestic market, he said.

"I think U.S. consumers could see milk prices increase moderately, but I don't think it will lead to any huge savings in the grocery line this year," said Norris.

Milk at $4 a gallon is already a reality in many U.S. cities. Nevertheless, the average price nationwide is still holding under $4.

"I don't know that $4 is the threshold anymore because consumers don't have a choice but to buy milk at whatever the price," he said. "For consumers who are feeling the [price] squeeze, they'll just buy less, maybe a gallon and a half instead of two gallons of milk."