May 28, 2003

URBANA—Record-low prices, continuing production challenges and tough competition are among the challenges faced by Illinois dairy producers, said a University of Illinois Extension dairy specialist as he reviewed the industry in conjunction with June Dairy Month.

“Prices paid farmers for milk are at a 30-year low with no light visible at the end of the tunnel,” said Michael Hutjens. “Our dairy managers need a price of $13 per hundredweight to cover the costs of production. Their base price today is $10 to $11.”

Making up the difference in some cases are premiums paid for higher quality milk, dividends from milk cooperatives, and the federal Milk Income Loss Contract (MILC). The latter is triggered by target prices for milk in Boston and the new farm bill. When the price falls below the target, dairy producers can receive payments ranging from $1.80 to zero per hundredweight.

“That program is making a big difference now for many producers,” said Hutjens. “However, it was only supposed to cost $1 billion and is estimated it could cost nearly $4 billion for 2003. It may be a candidate for reduction or elimination in the future as the U.S. debt is rapidly increasing.”

Illinois’s small average herd size—87 cows—is below the national average of 124 cows. In terms of the MILC program that works out to a plus as payments are targeted to smaller-scale operations.

“Additionally, Illinois dairy cows are producing top quality milk which allows many producers to add 75 cents to $1 per hundredweight to their price through premiums,” Hutjens said.

However, as Hutjens noted in terms of the overall price problem, there is no immediate end in sight for tight or non-existent profit margins.

“Right now, there does not appear to be any big factor on the horizon that would get prices back up,” he said. “Basically, it would take a weather problem such as a drought in another part of the country to reduce supplies of milk, forages, and/or grain to the point where prices would rise.”

There is another way, one being actively pursued by a coalition of dairy cooperatives. The coops are proposing to assess their members to create a fund called the CWT or Cooperatives Working Together program. The money would be used to buy up U.S.-produced milk and export it to dairy-deficit nations and/or buy up U.S. dairy cows and heifers for slaughter, reducing dairy cow numbers and total production and, hopefully, raising the prices paid dairy farmers.

“If this program works, we could see prices paid to farmers go up $1.50 to $2 per hundredweight,” said Hutjens.

Illinois dairy cow numbers dropped slightly—nine-tenths of one percent—in 2002 at the same time that U.S. dairy cow numbers rose slightly—three-tenths of one percent. However, per cow production in Illinois averaged 17,835 pounds compared to the U.S. average of 18, 571. Arizona, a state with a number of mega-size dairy operations averaging 1,014 cows per farm, came in with an average of 23,486 pounds per cow. Dairy cows in that state can average $622 in additional gross income per cow with at least one-half of that figure representing more profits.

“More pounds per cow translate into more profitability,” said Hutjens. “The last pound of milk is the more profitable with the first pound as the most expensive to produce and large-scale operations have economies of scale that allow them to increase profits.

Illinois dairy cows produced 2.05 billion pounds of milk in 2002, about 1.2 percent of the U.S. total figure of 170 billion pounds, ranking the state 19th in milk production. In both cow numbers and milk yield per cow, Illinois ranked 20th in 2002.

“Opportunities exist for Illinois dairy producers, but the key is management,” said Hutjens. “A survey of northeastern Iowa dairy operations, which are similar to those in Illinois, showed production costs ranging from $9.48 per hundredweight to $15. Operators of the poorest performing herds actually paid for the privilege of milking cows through lost income while the most efficient operators earned $29 per hour.”

Producers can gain some measure of control by locking in a portion of their milk and input prices. Other challenges reflect the changing nature of the industry.

“One question that is emerging is ‘will there be a place to sell your milk if you only have a 40-cow herd?’ “Hutjens said. “The new rule of thumb is that if you have enough milk to fill a tanker, you’ll have a market. It takes about 600 to 700 cows to fill the typical tanker truck and, again, the average herd size in Illinois is 84 cows.”

Each dairy producer needs to determine the optimal level of milk production for his or her herd and then strive through management practices to achieve it, including keeping a close track of debt load and manure management, a factor that Hutjens believes will emerge as a major issue in the future.

Within Illinois, the dairy industry saw other changes in 2002. Clinton County, located in the St. Louis metropolitan area, is now the state’s number one milk producing county, passing by Stephenson. Jo Daviess County, like Stephenson in northern Illinois, lost its number three spot to Washington County, also in the St. Louis milk market area. Hutjens believes that the St. Louis area counties will continue to grow in terms of dairy production and cow numbers while Stephenson and Jo Daviess counties may continue to decline.

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