Will dairy industry fare better in 2010?

The past year was one of the worst years ever for the dairy industry. Milk prices collapsed at the beginning of the year. What made it worse than past years with low milk prices is that feed and other costs were so high. The most important question is “How much light is there at the end of the tunnel in 2010?”

The key to the high prices in 2008 was trade. The dairy industry contended with high feed costs, as did the rest of the livestock industries, since late 2006. The difference was booming trade and domestic demand that kept prices high and most dairies profitable. Exports boomed because of world demand for dairy products and tight supplies from other major exporters like Australia and the European Union. The United States continued to expand production, at profitable prices, to fill this growing demand.

That changed in late 2008 with the economic and financial crisis. The increase in milk supplies in other parts of the world curtailed U.S. exports. The economic crisis dampened demand that has not recovered.

The U.S. produced close to 189 billion pounds of milk in 2009. That was about 1 billion pounds less than in 2008. Huge financial losses prompted three Cooperatives Working Together herd buyouts of more than 200,000 cows in 2009, as the industry tried to help cut milk production. Economic conditions will probably continue to moderate supplies in 2010, pushing production down another 2 billion pounds.

The U.S. all-milk price averaged about $12.50 per cwt. in 2009. That was almost $6 per cwt. lower than in 2008. By late 2009, the Class III price had climbed close to $14 from $9.31 per cwt. in February.

It appears milk prices are going to rebound in 2010, with the U.S. all-milk price averaging close to $16 per cwt. For milk producers to recover financially from 2009’s disaster, a stronger world economy and recovered consumer demand will be necessary. Continued growth in feed production and good weather, resulting in lower feed prices, will be necessary for margins to recover longer term. High feed costs and lackluster domestic and world demand will limit any price and margin recovery to profitable levels.

Like other livestock commodities, economic recovery is a key for the dairy industry. While milk supplies may be smaller, economic recovery would provide the demand boost necessary to drive prices back to largely profitable levels soon in 2010.

Anderson is with Texas AgriLife Extension Service.

This article published in the January, 2010 edition of THE FARMER-STOCKMAN.

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