The January Federal Order Class III milk price was announced by USDA at $14.50/cwt down $0.48/cwt. from December, although up $3.72/cwt from January 2009. The lower F.O.Class III milk price for January in comparison to December was primarily the result of the cheddar block market declining significantly in late December. Unfortunately, nonfat dry milk and butter prices have substantially weakened placing some pressure on the cheese market. One analyst believes that the cheese market could possibly decline as far as $1.35/lb., although the same analyst claims: "if the cheese market retreats to $1.35, it won’t be there long enough for you to take a deep breath."

The following data reflects the past 61 months Class III milk prices:

2005 14.14 14.70 14.08 14.61 13.77 13.92 14.35 13.60 14.30 14.35 13.35 13.37 14.05

2006 13.39 12.20 11.11 10.93 10.83 11.29 10.92 11.06 12.29 12.32 12.84 13.47 11.89

2007 13.56 14.18 15.09 16.09 17.60 20.11 21.38 19.83 20.07 18.70 19.22 20.60 18.04

2008 19.32 17.03 18.00 16.76 18.18 20.25 18.24 17.32 16.28 17.06 15.51 15.28 17.44 2009 10.78 9.31 10.44 10.78 9.84 9.47 9.97 11.20 12.11 12.82 14.08 14.98 11.36 2010 14.50

USDA reported that U.S. milk production decreased 0.40 % in 2009. I continue to hear reports about dairy producers hard hit by the low commodity milk price crisis of 2009. This is probably more indicative of highly leveraged dairy operations throughout the country and most notably in the west and southwest. During December, Minnesota milk production was +3.2%, Wisconsin +4.3%, Michigan +2.4%, Iowa +3.6%, California (-4.5%), Idaho +0.4%, Arizona (-10.9%), New Mexico (-3.2%), and Texas +0.1% in comparison to the same period one year prior. Some analysts are forecasting modest increases in US milk production in 2010 due in part to a plentiful supply of heifers, and lower feed costs. Milk prices will obviously play a role. According to eDairy Inc., they forecast the 2010 Class 111 price to average between $14.83 and $15.11; the 2009 average was only $11.36/cwt. In addition, I continue to read about worsening drought conditions particularly in Australia and to a certain degree in New Zealand which undoubtedly impacts Oceania milk production and indirectly, world prices for dairy commodities.

U.S. Cheese production during 2009 totaled a record high 10.1 billion pounds, up 1.7% or 170 million pounds from 2008, despite less milk production. Last year marked the 18th straight year that U.S. Cheese production set a new record high. First District Association produced nearly 143 million pounds of cheese in 2009, up 7.3% in comparison to 2008; a record high for FDA.

FDA cheese, WPC, and lactose sales remain strong despite high U.S. commercial inventories. FDA experienced its largest milk production month ever with record cheese production over 314 loads (10 loads/day) cheese manufactured and sold in January. Each load of cheese consists of over 40,000 pounds. FDA cheddar cheese is sold to many customers with a variety of uses including processed American cheese, cheese spreads, shredded cheese, powdered cheese for snack foods, and cheese sauces.

One thing for certain, nobody wants to experience another year like 2009. The outcry from producers throughout the country have rightfully challenged dairy industry leaders to review current dairy policy and search for solutions to resolve extreme price volatility and future catastrophic low milk prices. Undoubtedly, current government safety nets such as the "Dairy Product Price Support Program (DPPSP)" and "MILC" programs are being viewed by some as inadequate. In particular, the MILC program is being viewed as discriminatory by producers who exceed the milk production cap which will likely lead to significant controversy in the next Farm Bill discussions.

The National Holstein Association and National Milk Producers Federation continue to work diligently toward possible industry solutions (improvements?). The National Holstein Associations "Dairy Price Stabilization Program (DPSP)" is based on government mandated producer production controls (Supply Management). Dairy farmers would likely be required to pay a "Market Access Fee (MAF)" in the event they desire to expand. As expected, there are pros and cons to new programs. The DPSP may control U.S. Milk production growth, although may have undesirable consequences for the future U.S. Dairy industry viability and global competitiveness longer term. Very strong U.S. Government import controls would be essential if strict controls are placed on U.S. Milk production. Unfortunately, the dairy industry has not been successful in convincing the past or current "free trade" administrations to place stricter limitations on dairy commodity imports. It is highly unlikely that the U.S. government will significantly tighten imports since much focus continues to be placed on "Free Trade Agreements (FTA’s)" and global market initiatives. In addition, the DPSP program will likely create challenges for new producers, as well as existing dairy producers who desire to expand their operations for a diverse number of important reasons.

National Milk Producers Federation (NMPF) is working on a proposal titled "Foundation for the Future" The program is focussed on federal order reform including commodity market price discovery as well as a producer margin insurance concept that would be funded by the U.S. Government. The government insurance program would be national and would protect a portion of producer’s milk price margin over feed expense. Producers would also have the opportunity to purchase additional supplemental insurance that would likely be partially subsidized by the U.S. Government according to the proposed plan. The supplemental insurance would further protect dairy farmers margin regardless of milk and feed prices. The concept would likely result in the elimination of the current safety net programs including the dairy price support program and MILC program. The intent of the NMPF program will be to enhance producer protection beyond what the current safety net programs provide dairy farmers Admittedly, many questions and details are yet to be worked out. Clint Fall has been appointed to the NMPF task force and insurance subcommittee to provide important upper Midwest input in helping to develop a feasible and hopefully desirable concept that may be introduced in the next Farm Bill. The NMPF concept would undoubtedly lead to unprecedented U.S. dairy industry policy reform which may be considered by some as overdue.

In addition, the USDA Secretary of Agriculture (Secretary Vilsack) has formed his own advisory task force committee to develop ideas and recommendations for improving current dairy policy. The committee will apparently meet on a quarterly basis and will be challenged with providing important advice to the U.S. Secretary of Agriculture; also in preparation of the next Farm Bill.

None the less, it is important for producers to pay close attention and provide input to legislative representatives and industry leaders. Please feel free to contact Clint Fall at cfall@firstdistrict.com or ph: 320-593-4204 with any thoughts and recommendations.

First District Association will forward contract milk based on Class III futures for FDA members and customers who desire to lock in base values for milk. First District Association also provides a valuable option for interested and qualified members to "Average Price" a portion of their deliveries. This process allows for a smooth cash flow with level prices. Market information can be obtained by accessing the FDA Internet web page at www.firstdistrict.com, calling our voice mail system toll-free at 1-866-593-4235 or locally dial 593-4235, phoning Blimling and Associates at 1-800-726-9928, or contact Glenn Kaping at (320) 593-4239.

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