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

Preliminary data for 2007 indicates that U.S. total farm milk production rose 2.1%, reaching a record level of 185.6 billion pounds, during the past 12 months. This marks the third straight year with growth of 2% or more, and the first time since the early 1980's that production growth has topped 2% each year for three consecutive years.

Back then, milk prices were basically set by the U.S. Dairy Price Support Program, not by the marketplace. In 1983, surplus dairy product purchases by the U.S. Department of Agriculture (USDA) reached more than 12% of total U.S. farm milk production on a milk equivalent basis. Just think about what that meant: The amount of milk purchased as surplus by the federal government was more than the total increase in milk production during the previous record three-year period, 1981 to 1983, when milk production grew by nearly 10%.

What a difference exists today, where the demand growth for U.S. dairy products, both here and abroad, has allowed the 8.6% milk production growth of the past three years to be absorbed by the marketplace. Since 1977, total U.S. farm milk production has increased by over 51%, with nearly 63 billion pounds of additional milk entering the commercial marketplace in 2007.

Perhaps the biggest surprise is that this additional milk supply has not lowered farm milk prices. In fact, the all milk price received by dairy farmers during the past three years (2005-2007) averaged $15.75 per hundredweight, nearly one dollar higher than the previous record three-year average for 2004-2006.

Heading into 2008, many dairy sector analysts are concerned about the impact of high feed and fuel costs on farm milk production. Each month, USDA reports the milk-to-feed price ratio, which compares the price received by dairy farmers for a pound of milk to the cost of an average pound of dairy feed. Since July of last year, that ratio has continued to fall, reaching 2.82 in December. Although this ratio is right on the average for the past 20 years, the average milk price over that 20-year period was $13.85, while the December 2007 average reached $21.70.

The ability of the commercial market to absorb increased milk production in recent years has allowed nearly unprecedented growth, while at the same time bringing in the highest milk prices on record. To extend this pattern in 2008 and beyond, the U.S. dairy industry must continue its recent focus on demand growth, in both domestic and international markets, for the coming year.