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Smaller milk checks to arrive at dairy farms in MarchDairy farmers can expect smaller milk checks in their mailboxes in March as milk prices drop from record-setting highs, said Scott Brown, a dairy economist at the University of Missouri. While facing lower milk prices, producers will see feed costs and other expenses continue to rise. Declining prices and lower profits will be intensified by increasing milk production in the year ahead, said Brown, an economist with the MU Food and Agricultural Policy Research Institute. U.S. milk prices at the farm have reached almost $22 per hundredweight since last July, Brown said. "That is a record-setting level." In dairy outlooks presented in video teleconferences from the MU campus, Brown projected average milk prices for 2008 at $16.90 per hundredweight. That remains above the 2001-2005 long-term milk price average, but that may not be enough to compensate for increased production costs. "Even if milk prices stay near $17 there may be concerns. At best, that will be a break-even price," Brown said. "High feed prices will cut into profits. From 2002 to 2007, cost of production had risen $4 per hundredweight of milk. That cost is expected to go up another $1 this year. "While $20 prices looked good, they didn't lead to record profits. Those not close to the dairy industry might not know the extent that costs have gone up," Brown said. "The dairy business in 2007 turned out better than expected because of international demand," Brown said. "There was no single cause for higher prices last year, but a huge drought in Australia played a part." Australian dairy exports dropped sharply in 2007. Also, large stocks of non-fat dry milk and butter in storage in both the United States and the European Union were depleted, and there was growing demand for cheese. "The E.U. stopped subsidizing its dairy farmers and that reduced supplies in storage," Brown said. "Dairy farmers don't usually think about international markets, but in 2007 those were a big help." The declining value of the U.S. dollar also helped boost dairy exports. While exports are important, domestic demand remains the main market for U.S. dairy producers. "Consumers kept buying milk, even when prices reached $4 per gallon during the past year," Brown said. "When milk prices rise, you worry about users seeking substitutions," Brown told dairy farmers. However, alternative products such as soymilk also rose in price. The soy oil product rose from 20 cents to 50 cents per pound, which helped keep milk competitive with consumers. Food manufacturers that rely heavily on dairy ingredients also seek substitutions. Recently, Brown heard manufacturers speak at a national dairy conference in Atlanta. "Their biggest concern is not so much price level, but volatility in prices," he said. Controlling supply will be a challenge for dairy producers in 2008. In response to higher prices, farmers are bringing more cows into the milking herd. "We are already seeing an increase in milk supply. Going into 2008, it will be tough to slow that growth very quickly," Brown said. "It will be late 2008 before we begin to see a start of a slowdown in the increasing cow inventory." More milk per cow could add to the milk surplus. However, increasing feed costs may put the brakes on milk yield increases as dairy farmers cut back on feeding. "In 2008 dairy producers will face a problem finding markets for more milk. It's one of the risks facing the industry this year," Brown said. "While international markets were helpful in 2007, they just add another layer of risk for 2008." Brown said that while the projected price for the coming year is high compared to historical averages, that does not ensure profits. "Even at prices near $17 per hundred, producers face some serious red ink." 2/18/08 Date: 2/13/08
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