Though a lot of factors are in play that could affect dairy prices, Wisconsin dairy farmers should see their price rise by $1 per hundredweight in the coming year. The second half of the year could see even stronger prices.
That was the prediction from Mark Stephenson, Director of Dairy Policy Analysis at the University of Wisconsin-Madison. He spoke during an annual Ag Outlook conference Jan. 23 at the campus.
Last summer's drought trimmed profits in the dairy and livestock businesses in the state as feed became even higher priced.
However, without a drought "we would have had a milk price problem, with it we have a feed price problem," he said.
Feed prices impact Western dairy producers more than they do Wisconsin farmers who grow considerably more of their own feed.
Nobody knows what the weather patterns will bring in the coming year, but he noted that the La Nina phenomenon - a colder body of water in the Pacific - seemed to have contributed to drought conditions in the United States last year. The flip side of that phenomenon is that it brought extensive rains to dairy regions of Oceana - New Zealand and Australia.
That's important because those regions produce milk from cows on pasture and those pastures were lush in the last year. As a result those countries have been selling dairy products into the world market, keeping the price down and shutting U.S. exports out of the markets.
"What happens overseas matters."
Stephenson said the low-priced exports from Oceana were likely the reason that dairy commodity prices have fallen.
In Oceana, dairy production is seasonal on grass pastures, he noted, and their peak of production is now past with the world market having absorbed the commodities that were exported. That means that robust world demand may now turn to U.S. dairy products.
"It is likely that U.S. prices will not have much further to fall but rather that world prices will come up to meet our own."
The drought and rains in Oceana are part of the "southern oscillation" in global weather patterns. In last year's drought two-thirds of the United States was affected.
This has a direct impact on loss of crop production as well as quality of the crop that is harvested, he said.
In the first half of last year milk production increased significantly, up more than 4 percent in the first quarter, compared to year-earlier levels. As production rose, milk prices fell from $19 in January to $16.20 in May, on average across the country.
As the impacts of the drought and high prices of commodities was felt, dairy farmers began to back off their rations, often feeding less grain and concentrate. This dampened increases in milk production per cow.
Cow numbers were also trimmed by the low margins and the unusually high prices for cull cows, he said.
As a result of cow culling and stalled growth in milk per cow, month-to-month increases in total milk production slowed and were negative by the third quarter of 2012.
Production rebounded in the fourth quarter enough to allow the dairy industry to break the annual milk production milestone of 200 billion pounds.
The national average price of dairy rations, determined by the National Agricultural Statistics Service, spiked in 2008 to $10 per hundredweight but that spike didn't last too long. Many thought that $7 would be the new plateau but in fact the price stands at $13 now and has a huge impact on dairy producers.
In 2010 and 2011 dairy farmers tried to recover from the effects of the recession and low milk prices of the previous year. In 2012, U.S. dairy farmers received an average milk price of $18.30 per hundredweight, down from the all-time average high of $20.14 in 2011.
Wisconsin produced a record 27.2 billion pounds of milk last year, behind only California, but that 4 percent was offset by lower milk prices and higher feed costs, pinching dairy farm margins here.
The U.S. dairy industry was a fairly strong exporter of a number of products in 2007 and 2008, but all of that ended with the crash of the world's economy in 2009. Last year those export sales improved once again but were held back by the lower-priced offerings from Oceana.
Another factor contributing to dairy prices is the amount of product that sits in warehouses. When those supplies are large, they "overhang" the marketplace and depress prices.
Stephenson said that today the butter supply in storage is in a pretty normal range, "not burdensome" and a similar situation is in place for non-fat dry milk powder. Cheese levels are in fact below levels the country has carried previously.
"I'd say they are a little on the light side."
The supplies on hand and the price being paid to farmers "don't seem to track. We haven't seen the price improvement we would expect."
Fluid milk consumption per capita made headlines last year as they dropped to the lowest level in decades. Consumers here are now drinking less than 20 gallons of milk per capita and Stephenson blames a lot of that on competition in the beverage category.
Stephenson said dairy prices would be impacted by the coming year's weather and its effect on crop production, soil moisture and even things like Europe's sovereign debt problem.
The extension of the old farm bill is also a point of uncertainty for dairy farmers, he said. The old policy has only been extended until September so Congress will need to do something to have a new bill in place by then or that too will increase uncertainty.