Soaring milk prices prompted the world's largest yogurt maker Danone and dairy giant Lactalis to announce price hikes on Thursday, and analysts say other milk users such as Nestle and Cadbury are looking to follow suit.
The sharp rise in global milk prices comes as Europe's biggest food companies are already suffering from high wheat, vegetable oil and coffee prices, while near-record crude oil prices are pushing up production and transportation costs.
"The rise in raw material prices is well known and the ensuring hikes in food price are therefore no surprise," said analyst Pierre Tegner at brokers Oddo Securities, adding the price rises come after 18 months of food price inflation.
France's Danone, maker of Actimel and Activia yogurts, will hike its French yogurt price by 10 percent from Nov 21, to offset rising milk and other commodity prices that threaten to push up inflation, complicating European Central Bank monetary policy.
Domestic rival Lactalis, one of Europe's largest dairy groups, also plans to raise prices on its cheese and dairy products by 15 to 17 percent in December.
Danone's yogurt price hike follows an increase of 2.3 percent in the summer, and the Paris-based group added it expects milk prices to rise 30 percent in the first quarter of 2008 compared with the first quarter of 2007.
World milk prices have soared in 2007 driven by population growth, rising consumption in China and the Middle East and drought-hit production in big exporter Australia, sending prices of skimmed milk powder sharply higher.
With more euro zone food processors raising their prices, a sharp acceleration in euro zone inflation looks inevitable, analysts say, since food prices account for about 15.6 percent of the 13-member bloc's inflation index.
The ECB's primary mandate is to ensure price stability in the euro zone and such inflation spikes are a headache for the independent central bank.
Nestle Warns on Milk Costs
Nestle, the world's largest food group and also the world's largest buyer of milk, declined to comment on its pricing ahead of next week's third-quarter results, but has warned about high milk prices and the need to pass these costs on to the consumer.
Back in August, Nestle cautioned that higher input prices were likely to slow its volume growth slightly while the increasing impact of higher raw material costs, particularly milk, will heighten pressure on its profit margins.
However, industry sources say Nestle is likely to follow Danone with price increases over the next few weeks.
Nestle reports its third-quarter results on Oct. 18 and Danone its third-quarter sales one day earlier on Oct. 17.
Analysts say price rises in the shops will help offset the rise in milk costs for the processors and also from increases in other commodity prices with wheat and coffee prices both up 31 percent in the past year and palm oil up 70 percent.
Chocolate maker Cadbury Schweppes said the escalating milk price in the last three months has pushed up its confectionery costs modestly in 2007, and for 2008 commodity input costs are expected to be around 5-6 percent higher for both its confectionery and soft drink businesses.
While price rises for French consumers appear certain, Britain's biggest retailer Tesco hopes to mitigate the impact of any price hikes in the UK.
"There has been some upwards price pressure on dairy products because of the poor weather and the rising input costs but we try to keep prices down across the board," a spokesman for the world's third-largest retailer said.
In addition, farming industry figures said they did not expect the full increases to be passed on to the consumer.
"Consumers will have to pay a little more but what consumers pay is really the strategy of the retailer... If Danone raises by 10 percent, I don't think the retailers will increase to the extent of 10 percent. But it could be 5 percent," said Stanislav Jas, livestock policy adviser with EU farm union Copa-Cogeca.