Keeping tabs on dairy-industry developments is a large part of Jon Hill's job as sales manager for Nevada Hay Growers Inc., a cooperative representing 100 growers in the western part of that state. In 2009, that part of the job was anything but enjoyable.

“It was just a disaster,” says Hill. “I don't know how else to describe it. The dairy guys as a group just got nailed.”

To some, Hill's description might almost appear to be an understatement. Milk prices tumbled by more than half over a 14-month period. Dairy lenders pulled back funds, making it difficult for milk producers to forward contract on hay and other feed supplies. Then a mass exodus of cows and farmers — part voluntary, part forced — occurred.

In turn, effects of the severe dairy meltdown rippled through the hay industry. Large-scale dairies in California and Nevada are No. 1 customers for high-quality alfalfa produced by many of Nevada Hay Growers' members. Hill notes that the co-op typically markets 100,000 tons of hay annually.

But, in 2009, sales may have been off by as much as 20,000 tons. While some of the drop was likely due to poor weather that reduced yields, slack dairy demand played an equally important role.

As milk prices and hay demand toppled, hay prices retreated in near lockstep. In mid-November, Hill reports, top-quality dairy hay in his area was fetching $130/ton at the stack, down $100/ton from the high point of the year before.

His bottom line: “Dairy producers have to make money for hay growers to make money. Those guys have been losing big-time money, and until they get back to being breakeven or making money, things in the hay and forage industry are going to be slow.”

Focusing on trends in dairy cow numbers may be the best bet for getting a good read on just how quickly and to what extent the dairy industry might recover. Following a major expansion period that saw the national dairy herd grow by 349,000 head between 2004 and 2008, cow numbers began to reverse course in late 2008. During the first 10 months of 2009, the dairy industry shed 214,000 cows, bringing the size of the national milking herd at the end of September to just over 9 million head.

Most of the cow number attrition occurred in the Western U.S. Compared to year-earlier levels, dairy cow numbers were down 4.2% in California, 10.8% in Arizona and in Colorado, 5% in New Mexico and 1.4% in Idaho.

“It's astonishing,” says University of Wisconsin dairy economist Bob Cropp. “For years now, we've been used to seeing cow numbers and production in that part of the country go up and up from one month to the next.”

Coupled with a slight uptick in domestic and international demand for dairy products, the decline in cow numbers and the resulting downturn in total U.S. milk production played roles in improving milk prices during the second half of the year. After tumbling to a low-water mark of below $12/cwt in June, the all-milk price had climbed back to over $14/cwt by November.

While that bit of news is encouraging, Cropp says, “there's still a ways to go” before milk prices reach the point where financial stress among dairy producers is alleviated. “It will probably take an all-milk price of over $16/cwt for that to happen.”

On the upside, USDA is projecting that milk prices will continue to improve steadily, but slowly, throughout 2010. That sentiment is reflected in the futures market for Class III milk prices. As of mid-November, Class III prices for July 2010 were trading at just over $15/cwt, while December contracts were trading around the $15.80 mark.

While Cropp says he's “a little more optimistic” than USDA and the futures market on where prices will be at the end of 2010, he warns that trying to project the direction and pace of milk price changes over the long term is a difficult undertaking at best.

“It's a very sensitive market,” he says. “It doesn't take much of a change in supply or demand to move prices. Right now there's quite a range of opinion on where prices could be (at the end of the year) and all of them are possible.”

In any event, Cropp and other economists say the dairy industry will need to purge even more cows to bring supply and demand back into balance and restore normal profit margins to the industry. “We need to get the herd down below 9 million head, like around 8.9 million,” says Cropp. That would take cow numbers back to pre-2004 levels.

For hay growers serving the dairy market, the message is mixed. “There will be fewer mouths to feed as cow numbers continue to drop,” says Cropp. “But, depending on what happens to other feed prices, dairy producers will always be feeding alfalfa hay to their high-producing cows, and they'll be willing to pay premium prices for it.”