Penn State ag economist reviews state of PA dairy industry

University Park, Pa. -- Pennsylvania Secretary of Agriculture Russell Redding celebrated Dairy Month in Pennsylvania recently with a giant ice cream sundae and praise for the state's dairy industry. An economist in Penn State's College of Agricultural Sciences said that along with the praise, dairy farmers are hoping for a little financial help.

Redding said Pennsylvania's 7,400 dairy operations make up the largest sector of the state's agricultural industry, with more than $4.5 billion of total economic impact each year. But James Dunn, professor of agricultural economics, points out that they'll need continued strong milk prices to rebound from a tough 2009.

"The price of milk last year was about $5.50 below the previous year -- and below the production costs of almost all of our dairy producers," he said. "So a lot of farmers lost money, took on additional debt and went into 2010 with some real challenges. They've just finished putting out more money to plant forage crops, so between now and the end of the year, they're hoping that wholesale milk prices stay strong enough that they can recover from the bad year they had last year."

Dunn said the wild fluctuations in wholesale prices make dairy production a tough industry.

"The price of milk in the last three years has been as high as $24 per hundredweight and as low as $12.92 -- that's a big range," he said. "Milk isn't very storable and has a very short shelf life. Farmers can't adjust their production very much -- you have to feed cows, and they produce milk for a long time."

"If demand falls a little or supply climbs, prices can fall very sharply, and we've seen that happen many times," he continued. "It eventually crawls back up, then farmers expand, and down it comes again. Demand for dairy products is very stable in the United States; our consumption doesn't really respond to price, so a little extra milk or a shortage can drive price up or down sharply."

Dairy farmers are accustomed to a volatile market but don't like it, Dunn said. They often must rely on the high value of Pennsylvania land to provide collateral for borrowing. He points to factors that bode well for the rest of the year for dairy producers.

"Milk is now in the $17.50-per-hundredweight range and should stay there for the rest of the year, judging by the futures market," he said. "Corn prices are down and interest rates are low, and those things help farmers. So they should be able to make more money, clean up their balance sheets and get back to business producing milk and making money at it. Retrenching and stabilizing their situation is what they want to do now, given last year."

In other dairy news, Dunn says Pennsylvania is now the fifth largest milk-producing state in the nation, having been surpassed by Idaho.

"Idaho has a very different kind of dairy industry -- a kind of 'desert' dairy production with big farms that produce lots of feed with intensive irrigation," he said. "They've been growing and passed us, and they will probably pass New York to become the third-largest soon, if they haven't already." California and Wisconsin are still the top and second-highest producing states by large margins.

Dunn's monthly dairy market report, Penn State's "Dairy Outlook," is available online at http://dairyoutlook.aers.psu.edu/.

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Last Updated June 25, 2010