Here are six predictions for 2011. From this vantage point, it’s going to be a challenging year.
1. Severe margin pressure on the farm will be the storyline for much of 2011. Corn and soybean futures rallied to new highs at the end of 2010, while cheese prices were fizzling to nine-month lows. It’s not likely that commodity prices will fall to support (like they did in 2009), but the milk to feed ratio might not crack 2.00 again until next fall.
2. Domestic dairy use will continue to wallow. Americans consumed less milk, butter and milk powder in 2010. Once again, it’ll be up to cheese and yogurt to be the heroes on the demand side. Retail price increases won’t help; USDA projects the dairy consumer price index to jump about 5% in the year ahead, double the inflation rate of all other food categories.
3. Exports will drive dairy demand. Overall U.S. export volumes were up more than 40% in 2010, absorbing billions of pounds of milk and offsetting flat domestic use. Conditions at the start of 2011 are positive: import demand remains strong in emerging markets, butterfat is tight worldwide, supply from Oceania looks like it’ll fall short of projections again and higher world prices make the U.S. a competitive supplier.
4. Beware the return of “agflation.” It seems that 2011 is shaping up to be much like 2008: Soaring prices of oil and feed grains must eventually be passed along to consumers in the form of higher food costs worldwide. That could cause orders to slow.
5. Even more volatility in dairy prices. The combination of $6 corn and $15 milk can’t be sustained. The harder margins are pinched in the early part of the year, the further prices will run up in the latter part of the year.
6. No help from Washington anytime soon. Yes, you will get MILC payments (an estimated 50¢/cwt. to 70¢/cwt. for most of the year). But there doesn’t seem to be any urgency to move on the 2012 farm bill. The new Congress will operate under a mandate to cut government spending. Moreover, there are many new players on the Hill who need to be educated on the ins and outs of dairy. The National Milk Producers Federation will apply a full-court press for Foundation for the Future, but the supply-management component will be a difficult sell.
Alan Levitt is president of Levcom Inc. in Crystal Lake, Ill. Contact him at (815) 459-1742 or email@example.com.