National Milk Producers Federation

Last year will go down in the record books because of its sky-high milk prices. The average all-milk price for 2007, when the final accounting is done, will be above $19/cwt., about $6 per hundredweight higher than 2006, and $3 more than the previous record year of 2004. What a difference a year makes.

But the looming question, as we begin 2008, is whether the balance sheets of dairy farmers will be swamped by changing economics. No one is currently projecting that prices to dairy farmers will drop back to where they were in 2006. But prices are forecast to soften from last fall’s record peak. The only question is by how much they’ll drop.

As prices decline, the cost of dairy production is likely to rise in 2008. And there are three lingering production-related challenges that are likely to become more acute as the year progresses.

First, energy prices will still be smoking. Oil is near $100 per barrel again as the new year begins, well above where it was 12 months ago in the $50 range, and it’s not likely to drop much in the coming year. In addition to affecting every aspect of food transportation, from farm to fork, the high cost of petroleum also affects the cost of making the grain that goes into cows, in the form of pricier fertilizer and pesticides. So, farmers are not likely to get much of a break from the high cost of energy. And dairy is a very energy-intensive business.

Second, the recently-passed congressional energy bill is likely to keep grain prices high for the foreseeable future with its expanded ethanol mandate. After dropping back toward $3/bushel last summer, the cost of corn has sprouted towards the sky once again. Right now, you can’t find a sub-$4 bushel throughout 2008, and in most months, the cost is above $4.50. Making matters worse, soybean prices have also shot higher (and wheat is really out of sight), because of the race for acres that is making just about every coarse grain, and oilseed, in much greater demand. That’s great if you grow grain (even with those dear diesel costs), but it’s trouble for those buying their feed inputs.

Lastly, there is the ongoing challenge of labor costs and, even more importantly, labor availability. The biggest issue among many of the presidential primary votes and caucus-goers this winter is immigration. It’s also a big issue for dairy farmers, and many other employers who are reliant on immigrant workers to help them operate their businesses.

Because whether, and how, to implement immigration reform is such a hot-button political issue, it will be a big chore for Congress to pass such legislation in 2008. In the meantime, federal law enforcement authorities are raiding workforces to hunt down undocumented workers, and federal regulators are still hoping to begin issuing no-match letters to employers (pending the outcome of litigation over the matter) later this year. That leaves agricultural employers wondering about yet another major cost of production that appears beyond the control of anyone to improve.

All this means that milk prices in 2008, regardless of whether they approach last year’s $20/cwt. level in some months, will be significantly devalued because those prices won’t buy as much feed, fuel or workers as in the past. Unless something dramatic happens to knock oil and feed grains prices from their lofty perches, the profitability of the dairy business has the potential to be compromised this year.

And all this is absent any discussion of what production is doing right now, which is growing at a 3% annual rate. That’s how strongly milk production came on in the last half of 2007, largely in response to the surge in prices. Since more milk tends to reduce prices, we are facing a really dicey dynamic later this year.

All the more reason why we are fortunate to have Cooperatives Working Together in place for its fifth year. Even in the face of the headwinds of higher input costs, farmers in this country are tremendously productive. CWT, through both its export and herd retirement programs, gives our industry the ability to trim output and strengthen milk prices. In light of all the challenges I mentioned, we are likely to need a strong counterweight in 2008.