Commentary: A few bright spots in an otherwise bleak rising cost picture

by Ron Sterk
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With diesel fuel, gasoline and crude oil prices all hitting record highs this week, along with records for corn, soybeans, soybean oil, oats, rice and wheat in the past couple of weeks, it might appear "hopeless" for food processors who have to deal with soaring ingredient prices and increased transportation and packaging costs. But there are a few glimmers of hope in price outlooks.

Most notable are dairy product prices, which have continued to drop since peaking in the second and third quarters of last year. Increasing milk production in the U.S. and improved output in Europe and New Zealand have resulted in increased supplies and sharply lower prices, even as demand has remained strong.

"Prices for U.S. dairy products should be somewhat lower in 2008," the U.S. Department of Agriculture said in its latest Livestock, Dairy and Poultry Outlook. Because of projected increased milk production in 2008, in its March 11 supply/demand report, the U.S.D.A. projected dry whey prices to average 26½@29½c a lb in 2008, down from 33½@36½c projected in February and well below the 2007 average of 60c. Nonfat dry milk prices were projected to average $1.35@1.40 for 2008, down from $1.38@1.44 projected in February and below the $1.71 average for 2007.

Sugar prices also are expected to remain stable, if not decline modestly from current levels, which shot higher in February after an explosion and fire at the large Imperial Sugar Co. refinery in Port Wentworth, Ga. Although U.S. sugar beet producers are expected to trim plantings as much as 10% this year, increased yields from new bioengineered beets and open trade with Mexico, which has a larger 2007-08 crop, should mean ample sugar supplies for U.S. buyers and prices for 2008-09 (October-September now being booked) closer to 2006-07.

Energy costs are expected to subside after peaking in the March-April period, in part as the sagging U.S. economy drags down demand. In its latest Short Term Energy Outlook, the Energy Information Administration of the U.S. Department of Energy said, "The slowing economy combined with high petroleum prices is expected constrain growth in U.S. consumption of liquid fuels and other petroleum products in 2008." Although 2008 prices for diesel, gasoline and crude are forecast to average above 2007 levels, they are expected to recede in the latter half of 2008 and into 2009.

And the record low U.S. dollar against the Euro, the Japanese yen and other major currencies this week obviously contributed to record high crude oil and gold prices (over $1,000 an ounce for the first time), it has helped maintain strong foreign demand for U.S. goods, which at least is good for those in the export business.

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