February 4, 2010

US dairy prices to rebound after year of steep losses

A milk glut months ago made it unprofitable to sell milk but now, with prices improving, US dairy farmers are reversing course, saying they will produce as much milk as possible this year.

It is a wise strategy, according to most industry experts. Milk prices are expected to rebound in 2010 thanks to improved US sales and a recovering export market, so producing as much milk as they can may be the best way for dairy farmers to make up last year's losses.

In Wisconsin, for example, one dairy is expanding from 4,000 cows to 8,000, a move that might have seemed ill-conceived during last year's recession.

"Our goal today is to have our facility full," said Jim Ostrom, a partner with Rosendale Dairy in eastern Wisconsin. "In this industry, you can't make money without having your facility at capacity."

The average dairy farmer needs to earn US$15-US$16 per 100 pounds of milk to break even. Prices languished at US$12 last summer, their lowest point in seven years, before slowly climbing back to a nationwide average of US$16.50 last month.

Industry watchers expect prices to continue to increase this year. That is because demand for milk products within the US is slowly returning, and countries that had trouble affording American milk last year are regaining the means to import more, said Bob Cropp, an emeritus professor of agricultural and applied economics at the University of Wisconsin-Madison.

"As the world economy improves, I think we're looking at something close to US$17 in 2010," Cropp said.

For the industry as a whole, maximising production is not always a good thing. When too much milk is produced, prices can drop so low that all farmers lose money. But it is hard to persuade farmers to cut back production - if one does but his neighbours do not, he has less milk to sell and his rivals get a better price for all the milk they produce.

So an industry group stepped forward to try to reduce the nation's dairy herd in a way that does not hurt individual farmers. The National Milk Producers Federation runs Cooperatives Working Together (CWT), a programme that pays retiring dairy farmers to have their cows slaughtered.

The CWT programme kicks in when supply outstrips demand, including in 2008 and 2009 when it paid to have more than 250,000 cows killed. The figure represents about 10% of the total number of dairy cows slaughtered each year for food.

"We did have an imbalance between supply and demand heading into 2009," federation spokesman Chris Galen said. "CWT was the only way to collectively do something about it."

Most of the farmers who participated in CWT's programme last year were in the West and Southwest. Those farmers' feed costs increased more than in other regions, and their cows produced less milk in the unusually hot weather.