Fuel costs force up milk price

SYDNEY - Australia's biggest dairy co-operative, Dairy Farmers, lifted its prices yesterday, passing on higher fuel costs to consumers.

The price hike was the first significant indication from a large Australian company that there was upward pressure on production costs from record oil prices, raising the risk that interest rates may have to rise to curb inflation.

Dairy Farmers is Australia's largest farmer-owned branded food company with an annual turnover exceeding A$1.3 billion ($1.43 billion).

Australians consume over 2 billion glasses of Dairy Farmers milk every year, says the group's website.

Dairy Farmers said it had increased prices for its fresh milk, cheese, yoghurt and juice by between 4 per cent and 8 per cent.

"The high price of oil, which has been caused by a range of international factors, has significantly impacted the national farmer-owned co-operative's production costs, such as packaging and distribution," said Dairy Farmers chief executive Rob Gordon.

"Given that oil prices remain at record highs, we now have no choice but to pass on some of the increased input costs," he said.

Oil prices peaked at US$70.85 on August 30 and last traded around US$66 a barrel.

Quarterly inflation data due on October 26 will indicate whether rising prices are threatening the Reserve Bank of Australia's 2-3 per cent inflation target.

In August, the central bank dropped a warning that rates would have to rise, saying that inflation risks were balanced.

However, while the central bank does not base its rate decisions on swings in volatile items such food and petrol, it will look closely at the extent to which the oil price surge is raising production costs for companies.

No change is expected in the central bank's 5.5 per cent cash rate at its policy meeting this week.

However, financial markets are starting to price in the risk of an increase in the first half of 2006.

- REUTERS