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DUBUQUE, Iowa - Accurately forecasting the weather can be tough enough. But assessing where milk prices are going to head - and when - is another matter.
Bob Cropp, an Professor Emeritus of Agricultural Economics at the University of Wisconsin-Madison, gave it a shot recently. He delivered his "dairy marketing and risk management update" to a crowd of approximately 90 during the Twenty-fifth Annual Tri-State Agricultural Lenders' Seminar in Dubuque, Iowa.

Lower prices
There's a good chance milk prices will head lower in 2012, Cropp told lenders from Wisconsin, Iowa and Illinois.
"History tells us that milk prices can change a lot with relatively small changes in milk production, domestic sales or dairy exports," Cropp said. "History also tells us that after a period of low milk prices, prices will increase, and after a period of high milk prices, prices will decrease. That means there is a very high probability that milk prices will be lower in 2012. The question is, 'How much lower?'"
As a baseline, Cropp noted that the USDA was predicting the October, 2011, Class III milk price - the price paid for milk going into cheese vats - would average between $16.30 and $17.30 per hundredweight. The USDA was expecting a higher "all-milk" price, at $17.75 to $18.65.
Cropp offered his own estimates of what 2012 will bring. He forecast a Class III price and a "mailbox" price - what farmers actually receive after premiums and deductions are factored in.
For January, Cropp's estimated Class III milk price is $16.75, while his estimated mailbox price is $18.65. Prices begin to drop in February, according to Cropp's prognostication. Then, he expects a Class III price of $16.50 and a mailbox price of $18.40.
The slide continues in March, with an expected Class III price of $16.35, and an expected mailbox price of $18.25. Prices begin to perk up a bit in April, according to Cropp's figures. He has the April Class III price up a nickel, to $16.40, and the mailbox price also up a nickel, to $18.30.
The uptick continues in May and keeps going the rest of the year, predicted the economist. Cropp said he sees the May Class III price climbing to $16.50, and the mailbox price nudging up to $18.40.
Come June, said Cropp, he expects the Class III price to hit $16.65, and the mailbox price to reach $18.55. For July, he said he sees a $16.80 Class III price and an $18.70 mailbox price.
August should bring, said Cropp, a Class III price of $16.90, along with a mailbox price of $18.80. For September, add a dime to each of those, for a Class III price of $17 and a mailbox price of $18.90.
Cropp told the ag lenders that he expects October to bring a $17.50 Class III price and a $19.40 all-milk price. November could deliver slight declines: a $17.40 Class III price and a $19.30 all-milk price. December, according to Cropp's estimates, will continue the decline, with a Class III price of $17 and a mailbox price of $18.90.
For all of next year, Cropp said he forecasts the Class III price to average $16.81 per hundredweight, with the mailbox price averaging $18.71. Those would both be more than $1 lower than what Cropp thinks the 2011 averages will wind up at: $18.07 for the Class III price, and $20 for the mailbox price.
Cropp hedged his bets by noting that there's a "probability" that 2012's milk prices could turn out to be different than his forecasts or the USDA's forecasts. First, he said, there's "100 percent probability that prices won't be exactly" as he told the ag lenders.
There's also a "50-50 chance that prices could be a little lower," Cropp said. And, there's a 30 percent chance that milk prices could wind up higher.
"For milk prices to end up a lot higher will require one of the following or a combination of the following: a greater slowdown in milk production; stronger domestic sales; and stronger dairy exports," Cropp said.
The economist offered four reasons for the expected weakness in milk prices next year. They are: higher milk production, sluggish domestic demand, lower exports, and a possible overreaction by farmers to the prospect of supply management taking effect.
Cow numbers, said Cropp, have risen each month since October of 2010, with the exception of this past September. Even so, cow numbers were still one percent higher than in September a year earlier. The number of dairy cows being sent to slaughter has been higher, but farmers have plenty of replacement heifers on hand.
"With good milk prices, dairy farmers are still producing all the milk they can, to catch up on the equity they lost in 2009," Cropp said. And, talk of supply management being part of federal dairy policy has producers wanting to build high levels of base production.

Risk management
With lower milk prices possible in 2012, along with strong feed prices, dairy farmers should place more emphasis on "margin" protection, Cropp said. Livestock Gross Margin (LGM)-Dairy offers protection, he noted, as do futures and options. Plus, there are "opportunities" with forward contracting, he added.
Whichever strategy is selected - hedging or forward contracting - Cropp urged farmers to not forget about feed costs. "To do nothing," he concluded, "could be risky, especially if a dairy producer is rather highly leveraged."
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