High Energy Costs Could Convince Some Powder Makers to Switch Products
Energy prices were already on the rise before Russia invaded Ukraine, but the ongoing war has further spooked energy markets.
“Energy prices are rising quickly, lifting the cost of nearly every undertaking,” said Sarina Sharp, analyst with the Daily Dairy Report. “While consumers pay more attention to gas prices, diesel may be the more important economic engine. It powers the heavy equipment required for farming and manufacturing and fuels the trucks that move goods throughout the supply chain and ultimately to consumers.”
The national average price of diesel in the first week of May rose to an all-time high of nearly $5.51/gallon. That’s up 75% from a year earlier. Natural gas prices have also been heating up, with U.S. futures climbing 11% in first week of May.
“Production of natural gas has failed to keep pace with rising global production,” Sharp said. “Natural gas futures are nearly twice as high as they were at the start of 2022.” If futures prices come to fruition, they will raise the cost of energy-intensive activities, including production of synthetic fertilizers and dried milk and whey powders, she added.
European energy costs have even been higher than U.S. prices. Diesel prices in late April ranged from $5.47/gallon in Moldova, a country bordering Ukraine, to $9.70/gallon in Sweden.
“Benchmark Dutch natural gas prices have fallen back to pre-war levels but have still risen more than five-fold from the beginning of the year, and they are now more than four times more than the price of their U.S. counterparts,” Sharp noted. “High energy prices could push dairy manufacturers with flexible capacity to reconsider their product mix.”
Disruptions to the flow of natural gas have led some manufacturers to wonder whether they will have consistent access to the gas needed to run milk driers, according to USDA’s Dairy Market News (DMN).Some industry participants also fear that increasing prices for consumer goods could erode demand for skim milk powder, DMN reported.
“Although consumers are already paying more for dairy, higher freight and manufacturing expenses will use up a greater share of the retail price, eating into revenues for dairy processors,” Sharp noted. “Similarly, dairy producers will have to spend more to run their equipment and move feed in and milk out. That makes milk production particularly pricey in states like California, where energy costs are especially high and where feed often travels great distances before it reaches a dairy’s commodity shed.”
