The following paragraph from the USDA Livestock, Dairy, and Poultry Outlook, September 17, 2009 tells the current and future dairy price story (italics added for emphasis).

"The August Milk Production report showed U.S. milk production estimates virtually unchanged from August a year ago, despite 145,000 fewer cows in the national herd. For the year to date, milk production has risen every month compared with the corresponding month a year ago, while the dairy herd has shown a decline for every month in 2009 since March. Continued low prices for milk and dairy products have not brought a decline in production, which would bring milk supplies into line with demand. Lower prices for feed ingredients, especially corn and alfalfa hay, have provided an incentive for producers to feed for milk production despite culling."

While there is certainly significant financial pain in the U.S. dairy farm sector, the key fact is that increases in milk productivity per cow has worked to offset the largest decline in U.S. cow numbers experienced since the January 2000 to January 2004 reduction. As we look ahead to the last quarter of 2009, total U.S. milk production is expected to be down only 1.6 billion pounds (0.8%) over 2008 production. Looking ahead to 2010, total milk production is anticipated to be down another 1.7 billion pounds (0.9%). These declines are in the right direction to bring market supply into balance with demand, but they are nowhere near enough to restore milk prices to levels experienced in 2007 and 2008.

While rising productivity is mitigating the draw-down in U.S. milk cow numbers, commercial use (fat-basis) is expected to increase by 2.7 billion pounds (1.47%) in 2009 over 2008. Looking ahead to 2010, commercial use is not expected to show much growth. Only 0.1 billion pounds (0.05%) 2010 over 2009. On a skim solids basis, more growth in commercial use is expected due to some additional exports of skim milk power and whey.

With U.S. milk production not expected to show a significant reduction in the coming 16 months, milk prices at the farm are expected to show only a modest rebound for the remaining quarter of 2009 and on into 2010. The All Milk price average for 2008 was $18.29. At the current time, it appears that the All Milk price will average between $12.5 abd $12.25 fro 2009. Looking ahead to 2010, the All Milk price will strengthen, with the forecast average of $14.55 to $15.55. The Class 3 price, averaging $17.44 for 2008, is forecast to be in the $10.65 to $10.85 range for the 2009 average. In 2010, the Class 3 milk price is expected to average $13.75 - $14.75.

These prices are not at all stellar when compared to the 2008 and even the 2007 averages. However, as pointed out in the Livestock, Dairy, and Poultry report, feed input costs have declined significantly from the high values posted in those years. the uncertainty going into the last quarter of 2009, and then into 2010 resides with these input prices. Will a record U.S. corn crop and a near record U.S. soybean crop push feed prices back to acceptable levels in 2010? What will happen to other input costs, such as fuel and energy? If these continue to moderate, then the All Milk price in the $14.55 - $15.55 could return net margins to minimally acceptable levels. However, if a restoration of world economic growth once again pushes these input prices higher in 2010, more financial pain for the U.S. dairy sector will likely follow in the coming months.

-Cameron Thraen, OSU Extension, State Specialist, Dairy Markets and Policy