Slowly, the dairy industry is recovering from the dismal prices and record losses encountered throughout 2009 and into early 2010. Class III (milk for cheese) prices usually drive the overall milk price and have averaged $14.07 per hundred weight for the first 9 months of 2010. This summer?s milk prices represent a return to levels that should cover costs of production for most dairy farms. However, it will take higher prices over an extended period of time for dairy producers to begin to replace equity that was lost in 2009 and early 2010 and volatile feed prices continue to have dairies concerned about changing costs of production. Grain supplies and feed prices have become an added concern for dairy farmers look-ing toward 2011.

While there is tremendous variation in costs of production from farm to farm, and a very small percentage of dairy farms may have remained profitable throughout 2009; typical dairy farms lost in the range of $350 to $1000 per cow in equity. This forced sev-eral Indiana farms into bank-ruptcy or receivership. Dairy farms that were better able to control their own forage pro-duction and that had more equity, often through owned land, were best positioned to survive the economic catastro-phe. Part of the losses were driven by high costs, especially feed and labor, exceeding re-turns from milk sales, but also from diminished value of cows and heifers as dairy replace-ments. Milk cow prices were at $1290 at the beginning of 2010, compared to $1920 a year earlier, although prices are now moving higher along with increasing milk prices.

Butter has been a bright spot for milk prices. US butter inventories in early summer were at a 5 year low as demand drove butter prices higher—much higher. At the time of this writing, butter was at $2.19 per pound, up $0.87 since February 2010 and $0.95 higher than a year ago. This is only about the fifth time since 2000 that Class I prices are being set by butter and not cheese values. It is unclear how long a rally in butter prices can sustain the all-milk price. Futures markets have only responded modestly to the leap in butter prices in nearby months, and little beyond November 2010.

Presently, the outlook for milk prices in the near term is better, but not spectacular. According to Chicago Mercantile Exchange futures on October 7th, 2010, Class III futures prices are expected to average $16.70, $16.23, and $15.27 for October, November, and December 2010, respectively. In Indiana, these Class III prices would translate to mailbox prices of $17-17.50 for the remainder of 2010. With corn and soybean prices expected to strengthen in early 2011, present forecasts call for triggering of Milk Income Loss Contract program payments beginning in February, 2011. Of course, anything that impacts milk production or product sales could dramatically affect a very fragile market.

On the optimistic side, butter demand is incredibly strong with high demand for cream going to the churns, export markets are gaining steam, and butter inventories are low. On the other hand, cow numbers seem to be on the rise again despite another round of the CWT herd buyout, cheese stocks are at historic levels, and the summer heat and humidity are giving way to more moderate tem-peratures that will encourage milk pro-duction. Fortunately, a return to 2009 prices seems unlikely, but the present modest rally in prices also is unlikely to last long enough to offset a meaningful portion of equity lost in 2009 and early 2010, es-pecially as feed prices threaten to squeeze milk in-come over feed costs.

At each downturn in milk prices there has been discussion of supply control programs, either self-funded or government driven. This time is no exception; and several compre-hensive proposals for dairy pricing reform have attracted their own supporters and detractors. Briefly, the plans put forth as the Fed-eral Milk Marketing Improvement Act of 2009 (Specter-Casey Bill), the Dairy Price Stabilization Plan (Holstein USA Plan), and the Foundation for the Future Plan (National Milk Producers Federa-tion) are garnering support. Chiefly, the plans differ in how milk prices are established in the federal orders, how futures prices are used to set prices, value of processor allowances for manufacture costs that are passed back to producers, government support pro-grams, and inclusion of supply management or production quotas. Dairy will be important during the debate in the next farm bill. Look for opportunities to learn more on the proposals.

Source: Nicole Olynk and Mike Schutz, Purdue University