A Fragile Recovery Economists predict 2010 will be better-but not great-for dairy

January 12, 2010 07:47 AM
Producers this year aren't likely to regain the equity and reserves lost in 2009, economists say.

Look to the recovering U.S. and world economies to help boost export market opportunities and dairy prices in 2010.

Shrinking U.S. milk production and fewer cow numbers should also create a more bullish year for dairy producers.

Even so, economists forecast a fragile recovery ahead.

"Headed to the surface but still underwater,” is how Cornell University agricultural economist Andrew Nova-kovic describes the situation for many U.S. producers.

"Dairies that purchase most of their feeds, as in California, Arizona and Idaho, remain seriously submerged,” he says. "It's not clear if what happens in 2010 will be enough to make them feel they've emerged above water with comfortable levels of profitability.”

The drop in U.S. milk production, which began in late 2009, "is the start of a good thing,” Novakovic says. "If production can stay 1% or more below year-earlier levels for the next six months, we'll start to see more serious improvement in prices.”

Milk prices in 2010 could climb $3.75/cwt. over last year's levels, says Jim Dunn, professor of agricultural economics at Pennsylvania State University. He foresees Pennsylvania's all-milk price reaching $18.13/cwt., $5/cwt. above its 2009 low.

Milk prices in New York could average $17/cwt., Novakovic says. In California, where milk prices often post below the national average, producers could see closer to $16/cwt.

Don't expect sizable declines in input costs, however. The milk price to feed ratio will improve over 2009, "but it won't be great,” Novakovic says.

Corn prices may remain above $4/bu. because of renewed strength in ethanol markets. "Some of the plants that were bought at a deep discount are making money, although the ones that have to cover all their costs still will not,” Dunn says. "I don't see prices above $5/bu. unless energy spikes up, which I don't expect.”

Novakovic thinks the corn futures price on the Chicago Mercantile Exchange will likely settle in the low $4/bu. range, but the crop's export markets remain uncertain.

The U.S. Department of Energy forecasts diesel fuel prices to rise modestly through 2010, reaching just over $3/gal. by year's end.

Fertilizer prices could drop. "They have fallen and are still weak,” Dunn says. "I don't think the world economy will recover very fast, so I expect fuel prices to remain at reasonable levels. Seed prices will be up.”

On the export side, strong world demand may return as household incomes grow in emerging markets like China. "But the question is whether we will make that sale,” Novakovic says. "The U.S. dollar is strengthening, and that doesn't help us export.”

A caveat for 2010: A worrisome, high level of stocks of dairy products in both commercial and government hands could restrain a price upsurge.

"These stocks will have to be reduced before we can see much price strength,” Novakovic says. "Many analysts are revising their forecasts to be less optimistic in the first half of 2010 but more optimistic in the second half.”

Bonus content:

Rabobank: Is Dairy's Recovery Strength Sustainable?

Jim Dunn's Dairy Outlook

Cornell Program on Dairy Markets and Policy

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