Hay growers with dairy clients may see them moving with a little more pep in their steps in coming months. Stronger milk prices, coupled with prospects for lower feed costs, are giving dairy producers the best shot they’ve had for solid profits in several years. Even so, several factors cloud the outlook.

“I think you can look at what’s going on in the dairy industry and say the glass is half full for producers,” says Robert Hagevoort, dairy specialist with New Mexico State University. “It’s been quite a few years since anyone has been able to say that.”

Strengthened milk prices in recent months explain much of Hagevoort’s optimism. The December Class III price for milk was $18.95/cwt, the highest monthly price for 2013, according to the Dairy Situation and Outlook’s January report from University of Wisconsin (UW) Extension. The report predicted a price increase to $21/cwt in January and about $22 in February. The January 2013 price was $17.05; February’s came in at $16.06.

Milk prices could taper off later this year as dairy producers respond to improved margins with increased production. But the report notes the futures price for Class III milk price won’t drop below $20 until April, below $19 until June and below $18 until November.

“These are very favorable milk prices compared to last year when the Class III price ranged from a low of $16.93 in March to a high of $18.95 in December and averaged $17.99 for the year,” writes report author Bob Cropp, UW professor emeritus of ag economics.

Moderating feed costs are another major positive for the dairy sector. The U.S. average corn price in December was $4.31/bu compared to $6.87 a year earlier. The average alfalfa hay price dropped from $217 to $187/ton over the same period. Soybean meal prices have been slower to retreat, but that’s likely to change due to prospects for a good soybean crop in South America.

“Feed prices are still high,” says New Mexico State’s Hagevoort. “But they are coming down and that will help improve margins.”

Even so, he’s quick to point out that dairy producers still face a fair amount of uncertainty in the year ahead. In the West, a major concern is that the drought in California and neighboring states could reverse the improved feed price outlook.

Also, while hay prices have dropped nationally, they’ve remained stubbornly high in parts of the region. For example, New Mexico producers, Hagevoort notes, still pay around $280-285/ton delivered for premium hay, roughly the same as they paid a year ago.

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Without a price decrease, he says, more and more dairy producers are likely to continue transitioning to corn silage rations. Producers like hay in the ration and cows like hay in the ration. But producers and their nutritionists have to be able to make it work financially. At some point, you have to wonder if producers will come all the way back to alfalfa even after prices come down. Maybe, maybe not.”

Dairy producers will also be keeping a close eye on how ag lenders respond to the dairy provisions of the new farm bill. “Since 2009, banks have been very conservative about loaning to dairies, and there are still a lot of dairy farms on the brink financially,” says Hagevoort. “The big question now is whether this farm bill will give banks the incentive to move off the sidelines and get more involved.”

Hagevoort was a speaker at last month’s annual meeting of the New Mexico Hay Association in Ruidoso, NM.

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