Feed costs for dairy cows will be higher for at least the first half of 2011, but increased milk demand will help drive sales and revenue, according to the report by Wisconsin researchers. Wisconsin is the No. 2 milk producer in the nation behind California.
"I think 2011 could be a good-enough year" for milk prices, said Mark Stephenson, a dairy expert at the University of Wisconsin-Madison who contributed to the report. "I think 2010 was a treading-water sort of year. There was a lot of equity lost on dairy farms across the country in 2009. It would take much better prices to make up for that."
The average dairy farmer needs to earn about $16 per 100 pounds of milk to break even. Prices languished at $12 in 2009, their lowest point in seven years.
The market began to turn around in 2010, and U.S. dairy farmers earned an average of $16.30. However, the return to profitability meant little to many dairy farmers who were still struggling under a mountain of debt.
A second year of growth will help those producers, even if the growth continues to be modest, Stephenson said.
"I'd say many of them are feeling cautious but hopeful," he said.
Milk prices collapsed in 2009 because of too much production and not enough demand. Dairy producers across the U.S. responded by slaughtering an average of 50,000 dairy cows a week because the glut made it impossible to sell their milk for what it cost to produce.
However, as U.S. sales and a sagging export market began to recover in early 2010, dairy farmers went in the other direction. They began to maximize milk production to help recover their substantial 2009 losses.
The dairy industry ended up producing an estimated 192.7 billion pounds of milk in 2010, a 1.8 percent increase over the previous year. This year's production is expected to be 194.4 billion pounds.
The Wisconsin report said milk prices could continue to edge upward this year, but that this would not translate into significant profits for farmers, at least not early on, because of a spike in the price of corn used to feed dairy cows.
Jim Ostrom, a partner with Rosendale Dairy in eastern Wisconsin, said corn that cost $3 to $4 last year now costs $6.50.
"We're very alarmed by the extremely high cost of feed," he said.
The increase is likely to take more of a toll on the West coast producers who buy most of their feed. Dairy farmers in the Midwest tend to grow more of their own feed, insulating them from price swings in feed costs.
A stable 2011 is good news for the dairy industry in more ways than one. Not only does it help producers regain financial stability but it also protects them in the event that congressional wrangling over federal budgets causes access to federal subsidies to dry up.
U.S. Agriculture Secretary Tom Vilsack signaled recently that cutbacks are likely as the aftermath of the Great Recession pushes U.S. government deficits to levels last seen during World War II.
U.S. Rep. Reid Ribble of Wisconsin said through a spokesman that a number of proposals are being drafted for his House Agriculture Committee to review, but the final result most likely will involve spending cutbacks.
"The Agriculture Committee, like everyone, will be asked to tighten its belt to help rein in our country's massive spending problems," Ribble spokesman Brandon Moody said.
Bob Cropp, a professor emeritus at UW-Madison, said one result might be the elimination of the federal Milk Income Loss Contract program, which provides payments to farmers when prices drop below a certain level.
One proposed alternative is a government-subsidized program that would provide assistance when feed prices exceed the price of milk. Early analyses suggest the program would help the government save money even while protecting dairy farmers from major price swings, he said.
"That's what makes this attractive - it's something that doesn't mean increased expenditures," he said. "If you come up with a program that gives farmers protection and costs less, (Congress) might pass it."