USDA lowers milk price forecast sharply

Lower milk prices and feed costs are forecast, but the lower costs won’t make up for the lower prices.

In yesterday’s World Supply/Demand Estimates, USDA lowered its milk price forecasts sharply from a month earlier. The midpoint projection for 2010 Class III prices was lowered from $15.25 to $14.50. The midpoint of the All-Milk Price projection was lowered from $16.55 to $15.85 or 70 cents per hundred.

The milk production forecast was raised for 2010 with milk production expected to be fractionally above 2009.

Cheese prices were reduced as higher stocks are expected to pressure prices. Butter price forecasts were raised slightly on the strength of current demand although higher milk supplies and weaker cheese prices may encourage higher butter production, pressuring prices later in the year.

The projected 2009/10 marketing-year average farm price for corn was lowered 20 cents on the top end of the range to $3.45 to $3.75 per bushel. World corn production for 2009/10 was raised 5.9 million tons. Global corn ending stocks for 2009/10 were projected to be 6.1 million tons higher with increases in most of the world’s major corn-exporting countries, including the U.S., Argentina, South Africa, and Brazil.

The U.S. season-average soybean price range for 2009/10 was narrowed to $8.95 to $9.95 per bushel. The soybean meal price was projected at $280 to $310 per short ton (2,000 pounds) compared with $270 to $320 previously.

U.S. soybean ending stocks for 2009/10 are projected at 190 million bushels, down 20 million from last month. Soybean production is estimated at 3.359 billion bushels, down 2 million from the January estimate.

Cattle price forecasts were raised for 2010 due to tighter meat supplies. This will provide more cull cow income and encourage culling which will help reduce milk supplies.

Smaller drop in cows and milk expected

Cow numbers and milk production may not drop as much this year as expected earlier, according to USDA's dairy outlook report released yesterday. The size of the U.S. dairy herd is expected to decline from an average of 9.2 million head in 2009 to an average of 9.015 million
this year. The big heifer inventory suggests that the decline in herd size will be more gradual than earlier forecast.

Milk per cow is forecast to increase 1.8 percent this year, to 20,950 pounds from
20,576 pounds last year.

Feed prices will decline as the price of corn is expected to average $3.45 to $3.95 per bushel in the 2009/10 marketing year and soybean meal is forecast to average $270 to $320 per ton. These forecast prices represent substantial declines from $4.20 per bushel for corn and $336 per ton for soybean meal posted for 2008/09. The resulting Milk-Feed Price ratio's will not be enough to create expansion, but they could limit the rate of decline in milk production.

Year-ending stocks in 2009 were about 12 percent higher on a milk equivalent fat basis than at the end of 2008, mostly due to especially high cheese stocks. On a milk equivalent skim-solid basis, stocks were about 3 percent higher.

USDA forecasts dairy product exports to rise substantially in 2010 compared with 2009’s depressed levels. Exports are projected to increase from 4.0 to 4.8 billion pounds on a milk equivalent fat basis and from 22.7 to 25.7 billion pounds on a milk equivalent skim-solid basis.

Domestic commercial use, on a skim-solid basis, is forecast to increase to 168.3 billion pounds in 2010 from 166.4 billion in 2009 and to rise to 188.8 billion pounds from 186.2 billion on a fat basis. Commercial use rose in 2009, mostly due to low prices, but the commercial use forecast this year will hinge more on the strength of economic recovery in light of higher
expected prices.

Cheese prices are forecast higher in 2010, at $1.575 to $1.645 per pound. Likewise, butter prices will strengthen in 2010 averaging $1.395 to $1.495 per pound. Prices for dry products will also rise this year. NDM prices are forecast to average $1.175 to $1.235 per pound and whey to average 37.5 to 40.5 cents per pound in 2010.

Based on product price forecasts, milk prices will rise in 2010 from those of 2009. The Class IV price is expected to be $13.95 to $14.75 per cwt, and the Class III price is projected to average $14.90 to $15.60 per cwt. The all milk price is expected to be $16.20 to 16.90 per cwt in 2010.

USDA bumps up milk price forecast a bit

Cheese and butter price forecasts for 2010 are little changed from last month in USDA's World Agricultural Supply Demand Estimates. But the Class III price estimate for 2010 was raised about a dime from last month due to higher forecast whey prices. The forecast for the Class III midpoint was $15.25 ($14.90 to $15.60) compared to $15.15 ($14.75 to $15.55) a month earlier. However, the Class IV price forecast was lowered reflecting weaker nonfat dry milk prices.

The all milk price is forecast at between $16.20 and $16.90 for 2010 (midpoint $16.55) compared to a midpoint of $16.60 in the January estimate.

The milk production forecasts for 2010 were raised by half a billion pounds to 188.9 billion, up from 188.4 last month. Milk production was forecast higher for 2010 based on the higher-than-expected January 1 dairy replacement heifer estimate. Herds are not expected to decline as rapidly as forecast last month, boosting milk production.

Dairy exports on a skim-solids basis for 2010 are raised, reflecting higher sales of cheese and nonfat dry milk. Import forecasts are lowered for 2010. Fat and skim-solids ending stocks are estimated higher for 2009 and stocks for 2010 are raised in the face of higher production.

ATTENTION COW JUDGING CONTEST PARTICIPANTS: Due to the poor print job of the Holstein class on the cover of our January 25 issue, we have reproduced the Holstein class on our web site: www.hoards.com . Click on Dairyman Extras to view the class. We apologize for the difficulty many have had in getting a good look at the cows in the Holstein class. We have made changes to ensure better print jobs in the future.

USDA expecting strong milk per cow

Expectations of higher milk per cow during 2010 have resulted in USDA pushing up expected milk production this year and lowering milk price forecasts slightly. The agency still expects cow numbers to average below 9 million cows for the year. (The December national herd estimate was 9.08 million cows.) However, some analysts doubt that cow numbers will be as low as the USDA predicts.

The USDA expects the higher milk per cow (+1.9 percent) to come about for two reasons. First, feed prices will be lower, encouraging more grain and protein supplement feeding. Corn price projections are in the range of $3.40 to $3.85 a bushel ($121 and $138 a ton) and soybean meal between $265 and $315 a ton. With rising milk prices, the Milk-Feed Price Ratio will improve but not as high as 2.5 which is the level that generally encourages milk production growth because of heavier feeding and less culling.

Another factor affecting milk per cow is the amount of culling that took place during 2009. Between normal culling and CWT cow retirements, dairy cow slaughter last year was up 224,000 head or 8.7 percent from 2008. The nation's dairy herd is younger and healthier as a result of the culling and should be more productive on a per-cow basis.

In its most recent outlook report, UDSA projects 2010 milk production to be about 188.4 billion pounds. That would be 0.4 percent below the estimated 2009 milk production of 189.2 billion pounds.

USDA forecasts that the Class III price in 2010 will average about $15.15 (between $14.75 and $15.55). That estimate is between 30 and 40 cents lower than earlier forecasts. The average Class III price in 2009 was $11.36 per hundredweight.

USDA forecasts the All-Milk Price for 2010 to be around $16.60 (between $16.20 and $17). The All-Milk Price averaged $12.79 in 2009.

Milk price average was $6.08 less in 2009

Although it ended on a two-month upswing when prices were unbelievably high by comparison, the worst producer milk price year perhaps ever has mercifully ended.

Announced USDA Class III price for December is $14.98 per hundredweight, an increase of 90¢ from November. This is both the highest price of the year and perhaps the only month it will cover production costs for most dairy producers across the country.

Even with those two months over $14, Class III price average during 2009 was an abysmal $11.36, a decline of $6.08 from the previous year and the lowest average since $10.42 in 2002. But there’s a huge difference between then and now. Production costs in 2002 were roughly $1 above Class III prices, while in 2009 they were $6 to $8 higher for much of the year.

The possibility that 2009 was the worst price year ever becomes a legitimate possibility when Class III levels are adjusted backward for inflation. For instance, $11.36 in 2009 is equal to $5.76 in 1986 – but actual Class III price average that year was $11.30. Adjusted back to 1979 it is equal to $3.81 – but Class III average that year was $10.91.

2009 prices still look horrible even when you go all the way back to the depths of the Great Depression. Adjusted back to 1935, the 2009 Class III price average is equal to just 72¢ per hundredweight.

The gift of higher milk prices ahead

Feed costs have fallen substantially in 2009 but are unlikely to fall as much next year, according to the latest USDA Economic Research Service outlook report. The benchmark 16 percent protein ration value is projected to average in the mid-$7 per hundredweight range this year compared with over $9 in 2008.

The U.S. dairy herd is forecast to continue to contract in 2010, with most of the herd reduction coming in early 2010. The U.S. dairy herd is expected to average 8.97 million next year and is expected to average below 9 million cows in each of the four quarters of 2010. The forecast decline in herd size will represent a 2.5 percent decline year-over-year. This decline follows a 1.3 percent decline in 2009. In contrast, milk production per cow is forecast to rise to 20,950 pounds, a 1.84 percent year-over-year increase and slightly ahead of the five-year-trend increase.

Commercial disappearance is forecast to rise by less than half-a-percent next year on a fat basis and to be virtually unchanged from 2009 on a skims-solids basis. World markets and export forecasts remain firm.

Cheese prices will likely average $1.290 to $1.300 per pound in 2009 and rise to average $1.615 to $1.695 in 2010. After averaging $11.30 to $11.40 in 2009, Class III prices are forecast to rise to average $15.15 to $15.95 next year. The all milk price is expected to average $12.70 to $12.80 this year and rise to average $16.35 to $17.15 in 2010.

Best performing herds "only" losing purchased feed costs

Whenever the milk-to-feed ratio gets above 3, there is a strong incentive to produce more milk. That was the case in the second half of 2007 when Michigan dairy producers had a $10.66 margin of income over feed costs, reports Chris Wolf, Michigan State University ag economist. Similar profit conditions prevailed throughout the U.S. in 2007. In fact, 2007 represented the best margin ever when not adjusting for inflation.

What followed in just less than a year were all-time low milk-to-feed ratios, ranging below a 1.6 ratio throughout the first half of 2009, reports Wolf. At this time, all dairy farms are suffering great financial stress. The farms that are surviving right now used their money wisely through the good milk price years. “The best performing herds are simply losing their purchase feed costs right now,” says Wolf. “Others are faring much more poorly.” Shown in the table are actual expense and revenue numbers for Michigan farmers this decade. (Click on the above image to ENLARGE it.)

As many know, the 2008 export market (which peaked at 11 percent of all U.S. production) was an all-time record. This helped underpin 2008 milk prices. “Currently, we are exporting half of what we did in 2008 which is causing inventories to build,” notes Wolf. Right now, cheese stocks are over 100,000 pounds over the same time last year. “Unfortunately, the holiday cheese orders are done,” says Wolf. “I believe these high inventories may cause spring futures on the Chicago Mercantile Exchange to retreat slightly due to heavy cheese inventories.”

Milk price will continue to strengthen

We can expect higher milk prices in the months ahead. The recent USDA Economic Research Service publication, Livestock, Dairy, and Poultry Outlook, explains the fundamentals at work.

Simply put, milk supply will be coming back into closer balance with demand. A continued drop in cow numbers will be a big driver. There has been a 226,000-cow drop in the U.S. dairy herd size during the past year. USDA expects the U.S. dairy herd to average 2 percent fewer cows during 2010 than in 2009. The estimated national herd in October was 9.1 million cows.

Declining feed prices should help push up milk per cow to trend levels during 2010. The 2009 average is expected to end up around 20,570 pounds per cow and rise to 20,950 next year, a gain of 1.85 percent.

The average price of corn next year is estimated to be around $3.55 per bushel compared to just over $4 this year. Soybean meal price for 2010 is projected to be around $280 per ton compared to $331 this past year.

USDA now is forecasting 2010 milk production to be 187.7 billion pounds, which would be a 0.8 percent drop from where milk production is expected to end up for 2009.

World demand, especially for butter and powder products, is improving the export outlook. The improved outlook for economic recovery in the rest of the world, especially in Asia, combined with lower-than-forecast milk production from Oceania, form the basis for robust export demand, says the report.

Cheese and butter prices next year are forecast to be approximately 35 cents and 27 cents a pound higher next year, respectively. This would translate into an average Class III price next year of around $15.40 next year compared to about $11.25 this year. The All-Milk Price could average in the range of $16.50 per hundredweight next year compared to $12.65 this year.

Town Hall meeting on dairy prices to be held November 6

For nearly a year, low milk prices have hampered dairy farm families. Throughout these financially trying times, numerous producer groups have come together to propose solutions for this challenging situation. On November 6, the Wisconsin Holstein Association will be hosting a forum to discuss remedies for this pressing matter. The town hall meeting will take place on Friday, November 6, 2009, at 1 p.m. at the Kalahari Resort in Wisconsin Dells. The four invited milk marketing and pricing specialists will provide the opportunity for dairy producers throughout the Midwest to ask questions and get answers regarding the proposed guidelines for dairy product pricing. All concerned dairy industry members are welcome to attend.

The panel will involve four industry professionals, and it will be moderated by Hoard’s Dairyman associate editor, Corey Geiger. Industry specialists will be given the opportunity to speak briefly before opening the floor to questions from dairy producers attending the town hall meeting. The panel will include Lucas Sjostrom, Holstein USA’s Government Relations Specialist and Communications Assistant; David Cooper, General Manager for Family Dairies USA; David Fuhrmann, President of Foremost Farms USA; and David Ward, Dairy Director, Cooperative Network.

Even though Lucas Sjostrom’s official title is Government Relations Specialist and Communications Assistant, this summer he spent nearly 100 percent of his “government” time on the Dairy Price Stabilization Program (DPSP). He has been traveling to cooperatives and organizations presenting Holstein USA’s DPSP around the country and developing marketing materials to better explain the program.

David Cooper currently serves as the General Manager for Family Dairies USA, the seventh largest cooperative in the country with 3,300 members in six states. The organization offers testing verification and dairy marketing services, leadership in dairy policy, trade, and Federal Milk Marketing Orders, and programs and activities to its members.

David Fuhrmann became the second president of Foremost Farms USA on September 2001. He is a 33-year veteran of the dairy industry. Fuhrmann’s career with the cooperative began in 1981 when he joined Wisconsin Dairies Cooperative ¾ one of the cooperatives that consolidated to become Foremost Farms USA ¾ to manage the barrel Cheddar cheese production facility at Richland Center, Wis. Foremost Farms is the nation’s eighth largest dairy cooperative and has 2,350 members throughout the Upper Midwest.

David Ward is the Dairy Director of Cooperative Network, based out of Madison, Wis. The largest statewide association of its kind, Cooperative Network is committed to building Wisconsin’s and Minnesota’s cooperative businesses. Cooperative Network serves more than 600 member-cooperatives, owned by more than 6.3 million Wisconsin and Minnesota residents, by providing government relations, education, marketing, and technical services for a wide variety of cooperatives, including farm supply, health, dairy marketing, consumer, financial, livestock marketing, telecommunications, electric, housing, insurance, worker-owned cooperatives, and more.

September milk production down 0.7 percent

Announced on Tuesday, September milk production was down 0.7 percent. That’s more than the 0.1 percent (revised) decline in August. In the 23 major dairy states, production totaled 13.9 billion pounds, down from 14 billion in September 2008. Cow numbers declined by 32,000 from last month, and now total 8.34 million milk cows. That’s 168,000 fewer than a year ago. In response, milk futures shot higher yesterday, along with butter and cheese.

The three states with the largest decline in milk compared to 2008 all were western states, including Arizona at a loss of 10.8 percent; Colorado, 7.1 percent; and California, 6.4 percent.

Midwest states and Texas had the largest gains in September. Top three gainers included Indiana that increased production by 5.8 percent; followed by Wisconsin, 5.2 percent; and Texas, 4.9 percent when compared to 2008.

Higher milk prices ahead, but . . .

Fortunately, higher milk prices are on the horizon. However, they may not be as high as they might have been, and, certainly, won't be what a lot of us would like to see.

Two developments that are dampening the milk price outlook is that cow numbers are not declining as fast as they might, and milk per cow is expected to climb with some strength next year.

The USDA's recently published outlook report predicts that cow numbers will continue to decline slowly during the rest of 2009 and during 2010. In 2010, the average size of the national dairy herd is expected to average below 9 million cows. That would be the first time that has happened in decades.

On the other hand, the rise in milk production per cow is expected to be 1 percent during 2009 and go up another 1.8 percent during 2010. That increase for 2010 is above the five-year average gain in milk per cow.

The decline in cow numbers will not be enough to offset the rise in milk per cow. Total milk production in 2010 is forecast to decline to 187.2 billion pounds. That would be down just slightly from milk production for 2009 projected to be 188.9 billion pounds. And that is why milk prices during the months ahead may not be as high as they might have been otherwise.

Thanks largely to recovering dairy product exports, we can expect dairy product prices to rise in late 2009 and during 2010. As a result, USDA is expecting the benchmark Class III price to average between $13.85 and $14.75 next year. That compares to an anticipated 2009 average Class III price of just over $11. The Class IV price next year is expected to average between $12 and $13. It should end up averaging about $10.45 this year.

The All-Milk Price during 2010 is expected to average in the range of $14.70 to $15.60, says USDA. For 2009, the All-Milk Price should average around $12.40.

What got us into this mess

With cheese prices up notably and milk futures edging up, we may have begun the long-awaited turnaround needed to at least get back to break even on our farms. But we still have a long way to go.
A presentation by Tom Suber of the U.S. Dairy Export Council at the National Dairy Leaders Conference helped us see what got us into this mess and what is going to have to happen to get us back to positive margins again.
As shown in the chart, the problem started back in early 2008. There was strong food and fuel inflation, which raised the prices of many commodities including dairy products. Milk output was flat in the European Union and down in New Zealand and Australia due to drought. China's dairy product consumption was soaring.
But then, milk production came back in New Zealand, Australia, and South America. As food and dairy product prices rose, demand faltered. As demand softened, product inventories began to build up.
Then there was crash of markets and the housing crisis here and around the world started what became a global financial crisis. About that time, the melamine contamination hit China, and demand for dairy products there dropped drastically. That caused further buildups of dairy product inventories around the world.
As the world's credit sources shut down, no one had any money to do anything. For example, neither the grocery store chain in Egypt nor the firm that imported products for the chain could get financing. Without the loans, there were no sales.
This combination of factors is going to have to be reversed before we can get out of this mess. There is some evidence that economies around the world are strengthening. Credit availability seems to be improving.
Things are looking brighter, although we have a long way to go. The improving outlook is the topic of an editorial on page 654 of our October 25, 2009 issue.

California dairy producers losing over $8 per cwt

Rising costs and falling prices continue to wreak havoc on dairy producers across the country. The situation may be the worst on the west coast based on numbers just released by the California Department of Food and Agriculture.

During the first six months of this year, the average price paid to California dairy producers was $10.47, while it cost $18.51 to produce milk during the first three months of the year. That spread yields an $8.04 loss for every 100 pounds of milk leaving the farm. High feed costs have been depressing margins for some time. Even with last year's substantially higher milk prices, the profit margin was only 16 cents due to high feed prices which pushed production costs to $17.31.

While all costs have been rising, it has been feed costs that have risen the most, moving from $6.48 during the first quarter of 2005 to $9.82 this spring. As CDFA points out, comparing the first quarter of 2005 with 2009, grains, minerals, and supplements costs per ton increased 56 percent. Meanwhile, dairy-quality alfalfa hay rose 63 percent per ton. To read the entire report, download this pdf, or visit the website. stats_2009_mid-year_report-1.pdf

Struggling dairy prices spotlighted on msnbc.com

Alongside stories about tensions in the middle east and health care reform, it was the dairy industry's depressed prices and nonexistent profits that took center stage Monday morning on msnbc.com. The front page photo showed a calf being fed along with the headline "Struggling dairy farmers milk other forms of revenue." The website is closely following the Elkhart, Ind., community of 53,000 that had an unemployment rate of 19.6 percent in February and claims to be the RV capital of the world — an industry that has been hit hard in the economic downturn. The "Elkhart Project," as named by the news group has been visiting with community members in Elkhart, Ind., to see how the economic downturn is affecting their daily lives and how they are keeping a positive outlook. When clicking on the story, you would see a video about a few of the local dairy farms, as well as a farm credit loan officer.

Susan Troyer, one of the farmers in the video says, "I can't believe that there is any dairy farmer in the whole U.S. that is actually making milk for what it is costing them to produce right now." You'll also hear from a farmer who has reduced his herd size and began doing custom calf raising and harvesting just to make ends meet.

Visit msnbc.com for Breaking News, World News, and News about the Economy

msnbcfront%20page.jpg

CWT announces eighth herd retirement

Last Friday, Cooperatives Working Together (CWT) announced that it will conduct its eighth herd retirement and second retirement of 2009. CWT announced that this round the bid submission time frame will be shortened, and they will instate a maximum bid level in order to have a more immediate impact.

The bid window has been reduced to two weeks and will have a maximum bid level of $5.25 per hundredweight. According to Jerry Kozak, president and CEO of the National Milk Producers Federation, “Carrying out a second herd retirement right on the heels of the largest-ever herd retirement should give us a double-barreled attack on milk production in a very short period of time, resulting in a farm level price recovery several months sooner than would otherwise occur.”

Farmers will also have the option of offering all bred heifers at a price of $700 per animal. Herds retired in any of the previous seven rounds will not be allowed to bid again. Bids are due July 24 to CWT. More information, including bid forms, can be found at CWT’s website.

Active discussion on Holstein USA’s Dairy Price Stabilization Program

Responding to growing member concerns, Holstein USA has been becoming increasingly more active in milk marketing. Not only have they established a milk marketing committee, but that committee has developed a producer-led plan to stabilize milk prices. In recent months, the Association has been meeting with milk co-op leaders, national dairy industry leaders, and others who might help implement the plan which is detailed on our website at http://www.hoards.com/dairyman_extras/dairy_stabilization.html.

Bob Cropp , the University of Wisconsin-Madison dairy economist who help develop the program after significant Holstein member input, was on hand June 29 at the National Holstein Convention in Sacramento, Calif., to detail the plan being proposed by Holstein USA to stabilize milk prices.

As he led the discussion, Cropp quickly pointed out that, “this is as depressed a dairy economy I have seen in my 42 years in the dairy industry,” he said. “At the heart of the issue is low pay prices for milk combined with high feed costs,” he said. Regionally, feed costs are running higher than average in many western states such as California, Idaho, and West Texas just to name a few, Cropp pointed out.

There are a number of reasons producer pay prices are down. Certainly the weakening world economy tops the list. Perhaps next on the list is the fact exports are dropping. In 2008, the U.S. exported 10.8 percent of our milk product. Exports are off significantly from that number due not only to reduced demand, but the fact major exporting countries like New Zealand and Australia are producing more milk, the European Union is subsidizing exports at a higher level, and the strengthening U.S. dollar is making our products more expensive to importing countries. All these factors may combine to drop exports 35 to 57 percent this year.

USDA provides first forecasts for 2010

Early looks at what’s ahead on both the income and expense sides of the business were provided by yesterday’s USDA publication, World Agricultural Supply and Demand Estimates-WASDE-470. It’s a 40-pager, but the first five pages have enough meat and potatoes for most of us.

Milk production is expected to decline in 2010 because of the problems our industry is experiencing this year. Cow numbers will go down with only slight gains in milk per cow. The All-Milk price forecast is $14.70 to $15.70 per hundredweight, compared to an expected $11.85 to $12.35 this year.

Cattle prices are expected to be higher in 2010 due to tighter supplies and improved demand both here and abroad.

USDA projects feed grain and oilseed prices will remain relatively high in the year ahead. The agency estimates the price of this year’s corn crop will be around $4.10 a bushel, plus or minus about 40 cents. That’s a far cry from the $7.50 corn we saw last year, but it still is well above traditional corn prices.

Soybean prices, USDA projects, could be in the $9.45-a-bushel area, plus or minus $1. Soybean meal prices are expected to be around $290 a ton, plus or minus $30.

Corn planting has been slow. As of last Friday, 48 percent of corn had been planted, compared to a five-year average of 71. Beans were only 14 percent in, compared to typical 25 percent on that date. Corn planting is behind the most in the eastern Corn Belt. Continued wet weather could shift more acres to soybeans as happened last year, further tightening supplies of corn.

January milk:feed ratio was worst ever

It’s the yardstick that perhaps illustrates most clearly of all just how steep the uphill battle is to make a profit with dairy cows these days – the milk:feed price ratio.

It’s a measurement of milk producer profitability that USDA began using in 1985, representing the number of pounds of 16-percent protein mixed dairy feed that could be bought with the value of one pound of whole milk. Rising milk prices tend to push the ratio higher; rising feed prices tend to pull it lower.

In all the years of roller-coaster ups and downs since then, the milk:feed ratio had never gone as low as it did in January 2009 – just 1.69. To put that figure into context, a ratio of 3.0 is considered to be the level at which buying feed and producing milk becomes profitable.

Sadly, it’s a record that seems destined to last for only one month. February’s announced Class III price of $9.31 was sharply lower than the January price of $10.78. On top of that, the prices of feed grains continued to rise. That’s the “perfect storm” scenario for more bad news for dairy producers, who are long overdue for a financial forecast that contains some sunshine.

12 things to not do during tough times

Amid the frustration of yet another boom-and-bust dairy cycle, one thing milk producers can be certain of is that because they're in the downturn now, recovery will be the next thing that happens.

When it will occur is anyone's guess, and short of a unanimous decision to enthusiastically cull cows and cut production there is little that dairies can do to make it arrive any faster. So what should they be doing in the meantime?

According to a dozen industry experts we talked to in the last few days, perhaps the best strategy is what they should not do. That way when the inevitable turnaround does begin their herds will be ready and able to capitalize on it. From a list that could have easily been several times longer, here are 12 recommendations of what dairies should not do during tough economic times:

1. Don't think you're all alone in this situation.
2. Don't stop focusing on high production per cow.
3. Don't keep grossly unprofitable cows.
4. Don't ruin your ration.
5. Don't stop talking to your lenders.
6. Don't let milk quality premiums get away.
7. Don't skip equipment cleaning and maintenance.
8. Don't stop vaccinating.
9. Don't back off on heat detection.
10. Don't stop using A.I.
11. Don't cut corners with fresh cows.
12. Don't ignore calves.

Feed prices taking their toll

As milk prices remain in the cellar, the high cost of feed is placing further strain on producers nationwide. For farms west of the Mississippi the strain may be the greatest in California. In a just-released report from Moore, Stephens, Wurth, Frazier, and Torbet — a California-based accounting firm, net incomes for herds throughout the state were ranging from negative $138 per cow in Southern California to $188 in the heart of cow country, California's San Joaquin Valley. On a per-hundredweight basis that's a range from negative 90 cents to $1.13. Farm profits were higher for farms in Arizona, Idaho, and the Texas Panhandle. The only region in the accounting firm's report with lower profits was for farms in New Mexico.

While those numbers may seem livable, keep in mind that was during a time when California mailbox prices were near $16.25 for the state. Now, mailbox prices may drop by $4 to $5 or more, bringing severe financial hardship to farmers.

Feed prices remain robust. In January, 14,444 tons of Supreme alfalfa hay was sold with prices ranging from $170 to $268 per ton. Rolled corn was selling for $187.50 to $196.60 per ton; soybean meal at $359 to $361; and whole cottonseed at $317.25 to $319.25.

Resurgent dollar played a role in milk price collapse

No one thing ever triggers a farm milk price collapse all by itself, although the simple explanation usually boils down to too much supply and not enough demand. That's the case this time, as well, but what dairy producers may not appreciate is that currency exchange rates play a role in today's imbalance.

Not only has recession in the U.S. spread like an infection around the world to sicken other economies, it has also pushed the value of the dollar higher in relation to other currencies. Thus, when it comes to buying U.S. dairy products today, foreign buyers not only are more fiscally cautious but they also have less buying power.

Take Mexico for example. The No. 1 buyer of U.S. dairy products has seen the value of the peso drop from about 9.8 cents in mid-2008 to barely 7 cents today, almost a 29 percent decline. Canada, our No. 2 buyer, has seen its currency drop from $1.03 in late 2007 to just 80 cents today, a decline of 22 percent.

But that's just part of the problem. Partly because the dollar was so weak for so long, the percentage of total U.S. milk production that was exported soared in recent years. According to the U.S. Dairy Export Council, 3.6 percent of all U.S. production was sold abroad in 1996. In 2008, it is expected to be between 10 and 11 percent. U.S. dairy producers boosted production to meet that growing demand.

The effect of even a modest slowdown in foreign purchases of U.S. dairy products is drastically more sudden and painful today than ever before. That's one reason why the pipeline of dairy product sales plugged up virtually overnight, why domestic sales alone are hopelessly unable to keep up with production, why producer milk prices imploded, and why this situation in unlikely to turn around soon.