Dairy Prices Might Not Recover Until 2010

Published on: 11:06AM Jun 23, 2009

By Jim Dickrell

I have to stop going to ag outlook conferences—or at least leave the room when dairy economists talk. It’s just too darn depressing.

I spent a couple of days in Chicago last week attending FCStone’s Market Outlook Conference. The only immediate good news out of the meetings was that dairy prices are probably at their bottom.

I say probably because there was even some disagreement over that. Two of the economists, Bill Brooks, with FCStone/Downes-O’Neill, and Ken Bailey, formerly with Penn State and now also with FCStone/Downes-O’Neill, do their analysis based on supply and demand fundamentals. They both say we're at the bottom.

But Peter Ullrich, a Harvard-educated technical analyst, says the market is probably at the bottom but it’s too soon to know for sure. “We are developing a little bit of positive momentum, but not enough yet to determine a trend,” he says. “We’re very close to a turn in the trend.”

The real disagreement was over when prices would return to profitability. Here, Ullrich was the most positive. He believes dairy markets are set to come roaring back, perhaps reaching $18 or even $20 by November or December.

Bailey and Brooks are far less optimistic. Seven years ago, when the Class III prices rose above $10 for just one month between July 2002 and June 2003, it took 11 months before cow numbers started to liquidate. “And then it took another 10 to 11 months to take out just 129,000 head,” Bailey says.

He also says most dairy importing countries around the globe have negative gross domestic product growth (GDP) this year, making it extremely difficult for them to purchase dairy products. There likely will be a slight recovery in GDP growth in 2010, but Bailey doesn’t see economies fully recovering until 2011.  “The slow GDP growth is offsetting falling dairy prices,” says Bailey. “So we may not see a bump up in global prices until next year.”

Here at home, Brooks says income over feed cost (IOFC) projections remain bleak for U.S. producers. “Anecdotally, IOFC needs to be about $8/cwt to breakeven, and it’s been below $8 since December,” he says. “It could be later this year, or even 2010, before we reach breakeven.”

For milk supplies to tighten enough to raise prices, Brooks says the national herd size needs to decline to 8.8 or 8.9 million cows. “We probably need to go a little further than 9 million,” he says.

Last week’s May milk production report says there are still 9,275 dairy cows in the country. That estimate likely still includes the 100,000 Cooperatives Working Together that are going to market this month.

Even so, taking the national herd to 8.8 or 8.9 million cows means we still have to cull another 275,000 to 375,000 cows after the CWT round before prices improve substantially.

Jim Webster, a Washington insider since the Nixon years and editor of the Webster Washington Letter, says a legislative fix is not on the horizon. Congress and USDA have little interest in raising milk prices to the current cost of production by taking more milk off the market. USDA will spend more than $1 billion this year and more than $500 million next year in Commodity Credit Corporation dairy surplus purchases and Milk Income Loss Contract payments.

There’s also little support for supply management schemes, he says. “Sen. Patrick Leahy (D., Vt.) is the most likely candidate to champion dairy farmers, but [as chairman of the Senate Judiciary Committee] he is pre-occupied with confirming a Supreme Court justice,” says Webster.

The National Milk Producers Federation Strategic Planning Task Force is set to meet this week.  One can only hope its members will be able to do some very creative, out-of-the-box thinking. Simply tweaking CWT won’t get it done.

—Jim Dickrell is editor of Dairy Today. You can reach him via e-mail at [email protected].

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