Skyrocketing milk prices hit families just in time for school

CANTON, Georgia (CNN) -- Record-high milk prices are stinging Americans at the dairy case, just as millions of thirsty school children are returning to classes.

The average retail price of a gallon of whole milk has never been higher -- $3.80 a gallon -- according to July Department of Agriculture statistics. Experts blame the price spike -- up 51 cents since February -- on milk shortages in Europe and Australia.

Prices are approaching $5 a gallon in Georgia, where on a sweltering summer day last week, about 100 children and parents toured Mark Cagle's dairy farm north of Atlanta.

Tim and Beth Byington wrangled their two preschool children around the farm, surrounded by mooing Holsteins.

"It's really expensive when you're on a budget," said Beth Byington, who explains that her hands are tied when it comes to the cost of milk. Watch the Byingtons describe their struggle with higher prices »

"We can't do anything, and we have to buy our milk," she said. "So sometimes we cut back on other food -- like buying store brands and other things."

Her husband agrees. "I can't remember a time when it was this high," he said. The farm's black and white dairy herd gives about 400 gallons of milk a day -- a drop in the bucket compared to sprawling corporate-owned facilities that supply most of the nation.

But shoppers at the grocer's dairy case aren't the only consumers feeling the pinch. Starbucks coffee and Papa John's pizza blame their recent price hikes in part on more expensive milk. Cheese and ice cream makers such as Kraft and Ben & Jerry's said they're taking notice.

The cost of dairy products also touches millions of children who depend on America's federal school lunch program, which includes milk as a necessary part of their nutrition. See more about milk prices and school lunches »

"If milk prices do go up in a big way, certainly people who run school meal programs will notice it," said Joanne Guthrie at the USDA. "Just as a family that buys milk regularly would notice it and somehow adapt -- schools would too."

Lunch ladies -- and lunch gentlemen -- whose cafeteria budgets are stressed by higher milk prices may try to offset costs by substituting menu items with less expensive fruits or veggies, say analysts. Uncle Sam won't be adjusting federal school lunch subsidies -- if necessary -- until fall of 2008, at the earliest.

As she accompanied her daughter around the Cagle farm, Margaret O'Neill said she would prefer that her school-age daughter drink milk instead of soda. "It's much healthier," said O'Neill. "If milk's $5 a gallon, it's going to impact your lunches at school but it's still important to at least get something that's nutritious."

What gives? Grocery shoppers in Omaha, Nebraska, may be surprised to know that the blame rests on the other side of the Atlantic -- and the other side of the world. It's all about supply and demand. Decreasing dairy supplies and rising demand for it are forcing prices up.

Supply is down in Australia and Europe, while demand is up in nations with rising standards of living such as China.

"A drought in Australia has reduced their dairy export potential while the European Union has quotas that limit increases in milk production," said professor Michael Hutjens, a dairy industry scholar at the University of Illinois.

Also playing a smaller role in the price spike is higher demand for corn-based ethanol fuel, according to USDA analyst Ephraim Leibtag. Increased demand for corn pushes up costs for cattle feed, which is then added to the price of milk.

Although farmers such as Cagle are getting more money for their milk, they also are forced to pay higher prices to feed their dairy cows. The Southeast has been plagued for the past few years by droughts which have pushed feed corn prices higher.

"The dairy farmer is not making a significant amount of money because the input costs are so much higher than they were," said Cagle. E-mail to a friend

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