Got milk powder?

The world wants more dairy products. Is this a bad thing?

By Andrew Leonard

Published October 2, 2007 4:54PM (EDT)

You may have heard of Horizon organic milk and Land O' Lakes butter. Both dairy product brands belong to the Dean Food Co. (See UPDATE below) Dean is in a bit of trouble. On Tuesday, Dean announced it was slashing earnings estimates and laying off 600 to 700 workers -- a consequence of, said chief financial officer Jack Callahan, "the most difficult operating environment in the history of the company."

Callahan blamed an "extreme commodity environment." Dairy commodity costs rose to "all time highs" in the third quarter, said Callahan.

The reasons for dairy price hikes are well known -- the cost of grain-based feedstocks for dairy cows have surged, partly because of the diversion of corn in the U.S. to ethanol production. But maybe just as important has been a rise in worldwide dairy demand, as newly affluent middle-class populations around the world chow down on more milk and cheese and butter (and related products like, say, pizza, or cake, or ice cream) than ever before.

The most recent data indicate that dairy production in the U.S. is already jumping in response to the new price signals, but, said Callahan, so far, the burgeoning cow population hasn't had much of an effect, in part because of "strong export demand for non-fat dry milk powder."

(In its liquid form, milk keeps for around 18 days, making it a bad bet for the international export trade. Milk powder lasts for as long as 18 months.)

Strong international demand for dairy products means that one person's extreme commodity environment is another's market opportunity. Also on Tuesday, the government of India announced it was lifting a ban on milk powder exports that had been in place since February. India is one of the largest milk producers in the world, and its dairy farmers have been champing at the bit to get a piece of record high international milk powder prices.

The ostensible reason for the ban was to maintain adequate milk supplies for India's poor, a decision criticized by the dairy industry, who claim that domestic production has been outpacing domestic demand. Still, some consumer activists vocally opposed lifting the ban, arguing that milk producers would abandon local markets and higher domestic prices would ensue. Which raises the pertinent question: Does India, as a country, stand to benefit more from producing milk for a global market, or from maintaining low prices for domestic consumption?

Harvard economist Dani Rodrik touched on exactly this point in his blog last week.

Here is a question for the economics student: Are higher world food prices good or bad for the world's poor?

If you have been paying attention to the advocates of the Doha "Development" Round, who have trumpeted the benefits that the poor would get from agricultural liberalization in the advanced countries, you would be answering that it's got to be good. After all, poor people make a living off agriculture, and if the prices of what they produce increase, their real incomes must go up as well.

But now turn to the concerns being expressed about the consequences of the rise in food prices due to the growing demand for biofuels (especially ethanol made from corn), and you get the exact opposite implication: higher food prices, it is now said, raise the cost of living for the poor and reduce the real amount of food aid the gets delivered.

The answer to this question, says Rodrik, is that favorite economist standby that satisfies no one: "it depends." The calculus works out differently in every country, depending on how many people make their living from agriculture, and how many poor people can't afford to buy food at all. So "...whether the change is good or bad for a nation's poor as a whole depends on the geography of poverty in a country," concludes Rodrik.

This is typical Rodrik fare, eschewing global generalizations such as "trade liberalization is good" or "surging grain prices are bad" in favor of careful distinctions based on the unique characteristics of individual circumstances. It's a stance that doesn't lend itself to sound bites or consistent ideologically influenced proclamations, but it seems to make a whole lot of common sense.

Of course the thicket of nuance never stops getting more brambly. World Trade Organization commitments in conjunction with high dairy prices have encouraged the European Union to start slashing the subsidies with which it has propped up the price of milk in Europe. As a corollary, the big European dairy production multinationals have been quickly setting up shop in India. If the multinationals end up dominating the India dairy industry, and the poorest Indian farmers are unable to compete with the big boys, the calculus of who ultimately benefits will have to be adjusted, once again.

UPDATE: A clarification: An employee of White Wave, a subsidiary of Dean Foods states that "Dean Foods does not own the LAND O LAKES brand; rather it licenses the brand only for milk and other soft dairy products."

Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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