Illinois dairy producers likely face negative profit margins this year as feed costs exceed milk prices, according to a new University of Illinois Extension study.

Higher feed cost will be the reason for the decrease in returns, says Dale Lattz, University of Illinois extension farm financial management specialist who prepared the study, "Returns Exceed Costs for Dairy Producers in 2007, Profit Margins Likely to Turn Negative in 2008".  

Milk prices are also expected to average slightly lower than in 2007, Lattz adds.

Higher milk prices in 2007 more than offset higher costs, resulting in returns exceeding total economic costs, Lattz says. The average price received for milk in 2007 was 46 percent higher than the average in 2006.

  “The average milk price for 2008 is projected to be about 3 percent less, or about 60 cents less per hundredweight, than the average for 2007,” says Lattz.

Continued strong domestic and international demand for dairy products has helped keep milk prices strong even with increased supplies, Lattz notes. U.S. milk production is expected to increase about 2.2 percent in 2008 due to an increase in the number of milk cows and increased milk production per cow.

But while milk prices are expected to remain fairly constant through the rest of 2008, feed costs are expected to increase significantly.

Corn and soybean prices remained high most of the year, Lattz says. Feed cost per 100 pounds of milk produced would average about $11 using prices of $4.75 per bushel for corn, 21 cents a pound for protein, and $130 a ton for hay. This is based on annual feed consumption per cow, including replacement animals of 123 bushels of corn, 4,362 pounds of protein, and 8.2 tons of hay or hay equivalents.

“If non-feed cost per hundredweight of   milk produced averaged $9.50, total costs to produce 100 pounds of milk would be $20.50,” Lattz explains. “A 3 percent decrease in milk prices in 2008 for Illinois producers would result in an annual price of about $18.25 per 100 pounds.”

Combining total economic costs of $20.50 per 100 pounds produced would leave the average Illinois producer with total economic costs exceeding returns in 2008 by $2.25 per 100 pounds of milk produced.

To access the study, click here.

Source: Universityof Illinois