While there is optimism that milk prices will remain favorable in the new year, experts agree that with multiple variables in play, we should label it as “guarded” optimism.

Europe’s troubled financial situation and its effect on world economies, potential lower U.S. exports due to an increase in world milk supply — especially from New Zealand and China — high cull cow prices, tight hay supplies and continued high feed cost are just a few of the variables mentioned by Dr. Michael Hutjens, University of Illinois dairy extension specialist emeritus, and Dr. Bob Cropp, University of Wisconsin dairy economist emeritus.

“Dairy managers should be careful,” said Hutjens. “Although with extra market premiums Illinois milk prices are near $18 per hundred weight, debt load and payments must be considered.”

Cropp added that returns over feed costs will still be favorable but lower than what the industry experienced in 2011. “The continued sluggish U.S. economy will dampen any increase in milk and dairy product sales,” he said. “But lower and perhaps more stable raw milk prices should improve margins of fluid milk processors.”

The newly-released Fitch Ratings report concurs that processing margins in fluid milk should stabilize in 2012 due to moderately lower raw milk prices and cost reductions. Its analysts conduct annual reviews and outlooks on trends and issues for multiple industries. The report cautions that weak volume trends could limit wholesale pricing power and reinforce the need to reduce cost and capacity.

In general, Fitch Ratings shows the outlook for the commodity protein, produce and dairy sectors is stable for 2012, and that structural changes aimed at increasing operating efficiency and managing through cost volatility are expected to continue. Even though the cost of key inputs, such as corn and fluid raw milk, for animal feed and dairy products, respectively have declined, they remain elevated vs. historical averages. The report agrees with industry experts that Europe’s deteriorating macroeconomic conditions and changing rules around bananas trade and tariffs are also a concern.