America’s dairy farmers are facing incredibly difficult circumstances due to the global economic recession driving down demand here and overseas. Dairy supplies are growing, pulling down farm gate prices, according to Allison Specht, a dairy and regulatory economist with the American Farm Bureau Federation.

“This steep drop in dairy prices will be felt by dairy farmers for several months to come,” Specht said. “The cost-price squeeze is being felt across the country, leaving little room for error in individual producers’ management and hedging decisions.”

Specht prepared a special dairy report that is available at Dairy Market Update.

“It is no surprise to many in the dairy industry that dairy product prices have declined. What is surprising is the dramatic correction that took place from the end of December throughout January,” Specht explained in the report.

Dairy prices on the futures market traded at $14.13 per hundredweight on Dec. 1, $10.28 per hundredweight on Dec. 31, and $9.30 per hundredweight on Feb. 9. Milk prices are down more than 50 percent from last summer after hitting all-time highs in 2007 and climbing to the second highest level on record in early 2008.

Specht said the main culprit for low prices paid to dairy farmers is the general economic situation.

“The financial condition of consumers has changed domestic food consumption patterns, and dairy is feeling the negative effects of this trend,” Specht said. ”Exports had insulated the dairy industry from feeling losses in away-from-home demand, but this is no longer the case. While grocery dairy-buying may be expanding slightly, losing any food service demand, which accounts for 40 percent of dairy consumption, is bad news.”

The National Restaurant Association tracks the industry’s heath and performance, and December’s index marked the 14th consecutive month that the index was below 100. An index below 100 signals industry contraction, thus less dairy buyers in the marketplace.

On the export front, higher levels of production from New Zealand this year as that nation has recovered somewhat from past droughts, coupled with decisions by the European Union to once again directly subsidize exports have also contributed to much stronger competition in trade markets.

“Many analysts believe the dairy market is close to the bottom and should not fall much further,” Specht said. Butter and milk powder prices are at government support levels, and the federal government purchased nearly 162.3 million pounds of nonfat dry milk and almost 2.67 million pounds of butter between Oct. 1, 2008, and Feb. 6, 2009.

Most dairy industry analysts foresee depressed prices through the duration of the recession, however optimists anticipate a mid to late-year turnaround. “The U.S. dairy industry is positioned very well in the long-term (post 2009) assuming a growing world economy, but individual producer survival is dependent on management decisions and how long the short-term economic woes will last,” Specht said.