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2011 Ag Outlook

We spent most of 2010 catching our breath from the pummeling that milk prices took in 2009. While last year’s prices weren’t great, most farms were at least cash-flowing again.

2011 Ag Outlook

Tough year ahead for milk producers

We spent most of 2010 catching our breath from the pummeling that milk prices took in 2009. While last year’s prices weren’t great, most farms were at least cash-flowing again.

We could hope that 2011 would be at least as good a year, and maybe better. But that may not be in the cards. Just how bad 2011 will be depends on your business model — are you growing or buying most of your feed? — and on exports.

Meteorologists expect 2011 to be a La Niña year. That means cool and wet for the Northeast, and hot and dry for the Southwest.

This would benefit the traditional Great Lakes dairy states compared to southwestern producers. The U.S. dollar is fairly weak against major currencies. That makes our products look less expensive than our competitors.’

New Zealand and Australia are just getting into their production season. They expect to increase milk output this year. La Niña means wet for Australia and New Zealand, which should help their production.

Key Points

Exports to economies coming out of recession bring the best market news.

The second quarter may bring the year’s best milk prices.

High feed prices and cheese inventories curdle milk margins.

Milk production in the European Union has also been modestly higher. But they have inventories of skim milk powder to move into world trade.

The economies of China and India and other parts of the developing world are doing better that those of the United States and European Union.

So, global export demand should remain strong, while import demand should remain weak.

Cheese remains an issue for the United States. We exported a lot of cheese in 2010 — but made a lot.

Surprisingly, cheese prices remained quite strong, even in the face of large and growing inventories. But those inventories have to be reduced, and will exert downward pressure on milk prices.

Stephenson’s call: Last year’s modest milk price recovery was enough to push U.S. milk production into significant growth. Western dairies came back into production with amazing speed.

We’re still seeing only modest domestic demand growth for dairy. Unless Oceania develops weather problems, I don’t see much growth from our high 2010 levels.

Modest demand coupled with heavy cheese inventories and increased milk production can only point to lower milk prices in the first half of 2011.

Most dairy farms can weather somewhat lower milk prices in the first half of 2011. But feed costs will be a serious issue.

Last year’s milk prices averaged about $3.65 per cwt. above the 2009 low milk values. I’m forecasting that 2011 will be about 40 cents below 2010’s price.

However, the value of the ration may increase as much as a third. So, for producers who have their forage in the bunk and maybe their corn in the bin, it’ll be a tight year.

For producers who purchase all of their feed and who didn’t contract it early, the margins will be very thin in 2011.

Dunn’s call: The outlook for dairy prices in 2011 is very similar to that of 2010. The futures market prices for the next 12 months for both Class III and Class IV milk are 23 cents and 18 cents, respectively, above the 2010 average. That’s about equivalent to a Pennsylvania all-milk price of $18 for 2011.

The latest cow numbers are up 0.3% over 2009. That’s not a problem if export demand remains strong. The dollar is weak, which helps our dairy trade balance.

Butter, nonfat dry milk and dry whey are expected to be stable in 2011, although powder may tail off some in the spring.

The futures market expects cheese prices to rise, after a yearly low of about $1.40 per pound in February, to peak at $1.60 in the fall.

Class III and Class IV prices are consistent with this pattern, with Class III rising in the second half and Class IV mostly flat, with softening late in the year.

Feed prices are the big challenge in 2011, with corn and soybean meal moving much higher.

I calculate a milk margin that reflects the amount remaining from the milk price after the feed costs have been paid.

The November 2010 value ($13.93 per cwt.) was the highest since January 2008. The value for 2010 through November was $12.21. That margin would be about $11.50 for 2011, if feed and milk prices are as I expect now.

Dunn is a dairy economist for Penn State University; Stephenson, formerly at Cornell University, is the director of dairy policy analysis at the University of Wisconsin.

This article published in the February 2011 edition of AMERICAN AGRICULTURIST.

All rights reserved. Copyright Farm Progress Cos. 2011.

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