By Bob Yonkers, IDFA Chief Economist, Ph.D.

The Federal Milk Marketing Order benchmark price, the Class III price, has remained above $15.00 per hundredweight for 13 straight months, beginning with March 2007. Prior to the start of this record run, the Class III price had been above $15.00 in only 13 months; during this recent run, the number of months above this level has doubled.

For those in the dairy industry waiting for the Class III price to fall back to "normal" levels, the price of the Class III milk futures contract at the Chicago Mercantile Exchange (CME) suggests that it will be a long wait. As of the market close on Friday, April 25, the May 2008 futures contract price of $17.59 is the lowest through March 2010, which is as far out as the contracts currently are trading.

As the figure below shows, the monthly average Class III price over the past 10 years has averaged between a February low of $12.93 and a September high of $14.73. The range of monthly average Class III prices has tightened in recent years, with the five-year average February low of $15.26 and the December high of $16.45. In addition, the CME Class III futures contract prices for each month to March 2010 are well above the recent five- and 10-year averages.

Before 2007, the highest annual average Class III price reported by the U.S. Department of Agriculture (USDA) was $15.39 in 2004. Last year's record high was $18.04. Based on last Friday's CME futures contract prices and actual USDA announced Class III price so far this year, the markets expect an average of $18.26 for all of 2008. Looking farther ahead, the 2009 average of the monthly CME Class III futures contract prices as of the market close last Friday was $18.09.

Market expectations, as reflected by the CME futures contract prices, indicate that the dairy industry is only about one-third of the way through a three-year period of record-setting milk prices. Before 2007, the longest period with Class III prices above $15.00 was five months; the industry has already experienced 13 straight months above that level, and the futures market expects at least 24 more months of the same.