Although meat-and-dairy prices are expected to zoom even higher from their current record levels, this slice of the commodities boom won’t be a slam-dunk profit play for investors: Many food producers are watching the revenue gains they’re reaping from the rising market prices get wiped by even bigger spikes in commodity-related expenses.

“We are in the early stages of what will become a big mess for producers” of food products, including meat-and-dairy offerings, Greg Wagner, a senior analyst at Ag Resource Co., told the Dow Jones News Service. Over the next few years, retail food prices “will rise like never before.”

This explosion in prices that’s hitting the U.S. consumer right in the pocketbook is due to spiraling global demand, a nose-diving greenback, soaring energy costs and a big surge in the price of grains that are used both to feed meat-and-dairy herds and as a raw material in ethanol, the crude-oil alternative for which demand also is escalating.

Meat-and-Dairy Prices Meet the Global Commodities Boom

U.S. consumers are finally feeling the pinch of the global commodities boom - especially when it comes to meat-and-dairy prices. Indeed, after decades in which food prices rose at a very predictable average-annual pace of 3%, U.S. consumers in the past two years have suddenly experienced the kind of food-price uncertainty that’s long been a hallmark of less-developed economies.

In the past two years, retail milk prices have spiked more than 20%, cheese has jumped by nearly the same amount, and Grade A eggs have rocketed nearly 70%. Beef, pork and poultry prices all have escalated sharply.

And don’t expect your grocery bill to go down anytime soon.

In fact, in a study released only two weeks ago, former ConAgra Foods Inc. (CAG) Chief Economist Bill Lapp predicted that food prices will advance at the record-breaking pace of 9% a year from 2009 until the end of 2012. At that rate, food costs - once 10% of the budget of a U.S. household - could rise by 40%-50% or more over the next couple of years.

Lapp, now with Advanced Economic Solutions, says the U.S. government mandate for ethanol production is “the most significant factor driving corn and other agricultural commodity prices to record levels.”

(The U.S. ethanol initiative relies on corn as a key ingredient - unlike Brazil’s very successful ethanol-fuel program, which is based on sugar cane. As Money Morning has reported, scientists in the United States and other countries are looking at ways of developing ethanol from cheap-and-plentiful prairie grasses).

The expenses that go into bringing a food product to the supermarket shelf right now represents about 19% of each dollar a U.S. consumer spends on food. Over the next five years, that number is expected to jump to 29.9%, Lapp says.

And the single-biggest expense of food production is corn.

Lapp also points out that today there is no grain stock buffer in storage—in the United States or around the world—to mitigate the explosion in corn prices, which have hit a record $7 a bushel.

Almost half of U.S. produced corn goes to feed livestock, which means the prices of meat and dairy products are highly correlated to the price of corn.

Growing global demand helped cause corn prices to escalate from less than $2 a bushel in 2005 to $3.40 a bushel last year - and then to double to nearly $8 a bushel this year. In fact, the most popular corn-futures contract hit a record price of $7.9925 a bushel last Friday, before skidding back on Monday. Even so, corn prices were up 26% in June alone, the single-biggest monthly gain in 20 years, according to Bloomberg News.

“Corn costs have doubled, from $4 a bushel to $8, while energy costs have gone through the roof,” economist Glen Langan told BloggingStocks.com. “This will force many producers out of the market”

“Only the most efficient, modern producers will survive, with a few exceptions,” Langan added. That will “easily push meat and poultry prices 20% higher or more from current level… Dairy is harder to predict, because it’s more localized, but there will be dairy price increases, too”

Beefed Up Meat & Dairy Prices

The high cost of feed has also strained the markets for such dairy-product prices as milk, cheese and yogurt. And with good reason, since 65% to 75% of dairy farmers’ production costs are for feed, Chris Galen, a spokesman for the National Milk Producers Federation, told The AP.

The USDA’s June issue of the “Livestock, Dairy and Poultry Outlook” confirms that view.

“Milk production is forecast to rise only fractionally (about 0.5%) in 2009, as higher feed costs are expected to slow growth in milk per cow and as cow numbers decline slightly,” the “Outlook” read.

Meat producers also are watching their shares get tenderized by higher costs.

Even at current prices, U.S. beef producers already have to allocate 60% to 70% of their operating budgets to feed costs, The Associated Press reported. The huge costs are putting some of the smaller operations out of business, and others are cutting back on the number of cattle they hold. Cattle futures touched record highs last month as a result.

In fact, production levels for beef, pork and chicken are all being outpaced by consumption, according to the “Livestock and Poultry: World Markets and Trade” report from the U.S. Department of Agriculture. And that has strained the bottom line of many meat producers.