Dairy recovery depends on broader U.S. economy

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Livestock producers will lead a recovery in U.S. agriculture the next two years as the broader economy improves and demand for beef, pork and dairy products increases, University of Missouri researchers told Congress today.

Net farm income in 2010 is expected to jump 18 percent from 2009, to $66.5 billion, primarily because of the outlook for higher livestock prices, the Food and Agricultural Policy Research Institute (FAPRI) said in a report to the House and Senate agriculture committees.

“If jobs — and consumers — return, the agricultural sector will benefit,” said Pat Westhoff, co-director of MU FAPRI. “Higher incomes increase the demand for food, feed, fiber and fuel, supporting farm commodity prices.”

On the dairy side, the all-milk price is expected to increase by more than $4 per hundredweight in 2010, up from $12 last year. “Recovery depends critically on the general economy,” said Scott Brown, FAPRI livestock economist. “Recovering world dairy prices in 2010 will help support higher U.S milk prices.

“U.S. dairy is expected to become a larger player in world markets in the coming decade due to growing U.S. commercial dairy product exports,” he said.

“The outlook depends on more than uncertainty of the current demand picture,” Brown added. Many unknowns, especially energy, affect costs for grain and livestock producers.

Crop prices in the FAPRI baseline remain near the 2009 level in 2010 and 2011. “Each crop has its own story, but in general we expect crop prices to remain well above the pre-2007 levels,” Westhoff said.

Although corn prices are far below the 2008 peak, they are supported by continued growth in corn demand. “If the economy recovers, it will boost domestic and foreign demand for corn in feed rations, and ethanol uses an increasing share of the U.S. corn crop,” Westhoff said. “Mandates encourage more ethanol use of corn until 2015. Additional growth depends on corn-based ethanol being competitive as a fuel, which depends in part on oil prices.”

The baseline assumes that biofuel taxes and tariffs are extended when they would otherwise expire. That includes biodiesel credits that expired at the end of 2009 and ethanol tax credits to expire at the end of 2010. Biofuel use helps sustain crop commodity prices through the 10-year baseline period.

FAPRI baseline draws on economists from seven agricultural universities. Primary partners are Iowa State and Texas A&M universities. A preliminary baseline is prepared in November. Those results are examined in a national conference in Washington, D.C., followed by a new run of the baseline.

The baseline will be posted on the MU FAPRI Web site after presentation to Congress.

Source: FAPRI, University of Missouri

I hear what the FAPRI folks are saying about a stronger U.S. economy, but also have to hope that we are not totally wedded to it. Prospects for the economy are not particularly bright. Unemployment seems to have stalled at about 10 percent, which is high by historical standards and may now represent a “new normal.” Also, demand for milk is inelastic, meaning people still need to buy it regardless of whether the price is going up or down. “There are few cheaper substitutes for dairy products, so demand is not tied as tightly as some think to the overall economy,” says Dave Kurzawski, dairy broker with Downes-O’Neill in Chicago. “Milk prices will rally — and likely before the talking heads are telling us about the robust economy,” he adds. But when will prices rally? Or, perhaps more pointedly, when will cheese prices stop sliding on the Chicago Mercantile Exchange (since they usually portend where milk prices are heading)? “We don’t know what the ‘bottom’ will be,” Kurzawski says. “We suspect it is close, but that won’t prevent it from dropping further still. What we can suggest is that buyers are by and large in ‘greed’ mode. That is not to say they have a personality flaw. It is indeed what markets are made of: greed and fear,” he says. “So long as there is cheese for sale, buyers will look for a cheaper price. And since our abundance of cheese and sluggish demand have been fundamental hallmarks so far this year, buyers have little incentive to worry about higher prices,” he adds. — Tom Quaife, editor


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