Missouri Dairy Business Update

Volume 12, Number 12
December 2012

Will We See $39.50 Parity Milk Prices in January?

The popular press is full of stories this week about $7 a gallon milk coming in the new year. Is this real? The answer depends upon congress.

Unless last minute legislation is passed, the expiration of the farm bill means dairy policy will revert to 1949 legislation mandating parity prices be paid to farmers. USDA Secretary, Tom Vilsac, says the USDA is gearing up to comply with the law.

Many dairymen share the sentiment, "it's about time we finally make a profit producing milk." However, don't look for your January milk check to rocket to $39.50 per cwt, which is about what 75% of parity prices would indicate.

If parity pricing arrives in January, it will not mean that farm level prices will immediately jump to $39.50 per cwt. In recent low price periods milk prices have dropped below support levels for several months, without triggering large government purchases. Processors have chosen not to change their production and marketing plans to temporarily sell government specification dairy products into CCC warehouses.

The best indicator that major market players are discounting the potential disruptions coming from a move to parity pricing is that the CME Class III and Class IV milk futures reflect none of this scenario. As of December 26th, 2012, Class III futures prices for 2013 are flat as a table, varying less than $0.70 per cwt from January through December.

Sober dairy industry observers believe if parity pricing actually persists long enough for the dairy processing industry to contort itself to sell large amounts of dairy products to the USDA, the result would be a short term boom for dairy producers and a longer term disaster. Domestic demand would decline and export demand would drop like a rock from 13% of total milk production. Imports could soar. Government expenditures for dairy programs would soar. Eventually, when new legislation inevitably replaces parity pricing, dairy producers would face a long extended period of losses as milk prices bottomed long enough to reduce milk production to the new reality of reduced demand.

Progressive Dairyman featured a nice history of parity pricing a couple of years ago. Despite the appeal of $39.50 milk, farmers would be well served to let parity pricing stay a part of history.