7/13/2007 | Business Trends: Dairy prices pounding ice creamery profits

Dan Young didn’t want to raise prices this summer, but he had to if he wanted to stay in business.

“When I saw where prices were going to be in middle part of season, I knew I had to or I wouldn’t be here,” said Young, owner of Young’s Jersey Dairy in Yellow Springs , Ohio . “I don’t like to do it, and I can’t remember last time I did. If we do, we usually do that in the winter. Not this year.”

Between cream and milk, Young’s raw dairy prices had risen 23 percent as of June, and he expects those costs to rise at least an additional 8 percent before summer’s end.

Given current market numbers, that estimate is reliable. Cream prices are based on a multiple of butter prices, and through the late June, butter sold at the Chicago Mercantile Exchange was up 30 percent over the same period last year.

But soaring milk prices could make even Young’s experienced estimate fall short. Milk prices overall have risen as much as 75 percent over last year, when dairy products sold at bargain prices for restaurateurs. In June 2006, milk sold at around $11 per hundredweight, compared to this year’s summer’s mark of $20 per hundredweight.

Though slowing, upward price trends aren’t expected to reverse soon given other cost pressures faced by dairymen, including the cost of corn used in cattle feed. With ever-increasing amounts of the nation’s corn being diverted to ethanol production, prices are soaring.

Additionally, dry weather in the West and Midwest has lowered yields of other grains used in cattle feed, while the cost of fuels used in harvesting the milk and moving it to factories is at record highs.

Young believes those negative influences on price are long-term problems, not just seasonal commodities peaks destined to drop when the weather cools.

“I’m not an expert or an analyst, but I’ve watched these trends for a long time,” Young began. “In my opinion, this is more than just a temporary peak in commodity prices, this is a systemic change. What we’re realizing now is that a big part of our food chain is now linked to energy prices and not just commodities prices.”

Dairy market analyst and consultant, Jerry Dyer, agreed with Young’s assessment. High prices are here to stay for the reasons Young stated and because of relentless overseas demand for American dairy products.

“What I’m reading tells me the ice cream guys are clearly getting a hurt put on them this year,” said Dryer, also the author of Dairy Market Analyst newsletter. “Normally they pay a multiple of 1.2 (120 percent) on the cost of butter for their cream, but I see that price rising to more like 1.3 or 1.4 during this summer. Those are margin killers.”

Still screaming for ice cream

For at least a few ice cream operators, business is good this year despite other costs emptying Americans’ wallets. Young said steady sales prove customers still want their ice cream treats and are willing to pay higher prices, but he’s concerned they’re more cost-conscious this year about the drive to his semi-rural location.

“In the long run, that’s the thing that concerns me,” he said.

Patty Hendrickson, co-owner of Scoops Soft Serve in Temperance, Mich. , said her cream prices are up about 10 percent this year, but that business is steady and profitable. Warmer-than-usual weather likely has helped some, she added.

“We’re a higher-volume place than most shops, so I think we’re getting a break on (our dairy) price because of that,” Hendrickson said. “We’re happy so far with how things have gone this year.”

She said she hasn’t had to increase prices this summer and doesn’t anticipate she’ll have to. “We’re going to absorb the increase for right now,” she said.

Both Young and Hendrickson said they’re relying on other food sales to offset razor-thin ice cream margins, and that means selling “a lot of Coney dogs along with our soft-serve,” she said.

Hendrickson tries to drive sales by offering different flavors, but customers generally stick close to the favorites: chocolate and vanilla. “Trust me, if we take strawberry away, they get mad. Their tastes are pretty simple.”

Young hopes the growing popularity of gelato and sorbetto will grow sales. Among the gelato flavors in the freezer: cappuccino latte macchiato; tiramisu; panacotta; chocolate stracciatella; and peach. Sorbettos include orange, apricot and lemon.

Though gelato costs as much as ice cream to produce, the Italian-born product carries a European cachet he believes encourages customers to experiment. Still, even the semi-adventurous don’t flee their favorites easily.

 “We’ll put out a new flavor, ask them if they want to try it, and a lot will say, “Oh, isn’t that cute? I want a dip of chocolate,” said Young, laughing. “There are some folks, though, who want to try a different thing every time they come in a place.”

Some, he added, are obsessive test-tasters.

“There’s always a different set that wants to taste 12 flavors before they make a decision,” he began. “By time they taste twelfth flavor, I want to say, ‘It’s not like you’re investing in a new house! It’s just ice cream! Take a risk!’

“The bottom line is people do appreciate the variety. So we’ll always have new flavors for them. It makes it interesting for us to create them, too.”