Many dairy farmers culled their herds because of high feed prices caused by the drought, reducing the supply of milk. Price increases will flow through many food products beyond a carton of milk. - 

Extreme drought this summer meant higher prices to feed dairy cows, and now the U.S. faces the smallest dairy herd in almost a decade. That means higher milk prices, and not just for the kind you drink. Lots of types of food companies are affected, and the impact depends on the type of milk product they use. Mary Keough Ledman at the Daily Dairy Report told me about the four classes of milk:

  • Class 1 -- you drink
  • Class 2 --you spoon: yogurt, ice cream
  • Class 3 -- you cut: cheese
  • Class 4 -- butter and powder you can store forever

If you're a company that makes food with milk -- whether that's sour cream, soup or nacho cheese-flavored chips -- your costs go up along with milk prices. But the timing of when those higher prices hit depends on the product, says Keough Ledman. "Some of the more aged cheeses, like Parmesan, those cheeses were made nine months ago. It'll be longer to see the price increase."

Customers may not see the price increase at all. Companies look for other things to cut when milk goes up. Starbucks, for instance, may trim fuel costs or packaging instead of charging more for a latte. I talked to a spokesman, Tim McIntyre, at one company that relies on dairy: Domino's Pizza.

"Cheese is a very important part of the consumer experience," he says. "Americans love cheese."

He says cheese is about 40 percent of the cost of a Domino's pizza. The company uses about 200 million pounds a year, and that's just on pizza -- nevermind their stuffed cheesy bread, or pasta dishes with cheese. Using less cheese is not the answer to rising milk prices.

"One of the ways you offset an increase in any commodity cost is ensuring you keep your customers happy," McIntyre says.

Sure you could sprinkle on less cheese, but those pennies saved could cost you much more -- if your customers turn elsewhere.

Follow Eve Troeh at @evetroeh