DUBUQUE, Iowa —Milk prices didn't reach levels predicted at the beginning of 2013, but the average all-milk price for 2013 should average $19.58 per hundredweight, up $1.06 from 2012, said Bob Cropp, dairy marketing professor emeritus at the University of Wisconsin-Madison at last week's Tri-State Ag Lender's Seminar.

The annual outlook conference for lenders is sponsored by Iowa State University Extension, University of Illinois Extension and University of Wisconsin Extension.

"We thought widespread drought in 2012 and resulting feed prices would lower milk production," Cropp said. "High feed prices did lower milk production in the West but not in the Northeast or upper Midwest. The areas that raise their own feed are not as sensitive to high feed prices as the areas that buy feed."

Milk prices are higher in the upper Midwest and Northeast than the West, Cropp said.

The 2012 average all-milk price in California was $16.29 compared to $19.31 in Wisconsin. The September price improved to $18.30 for California, but was still nearly $2 below Wisconsin's $20.10 price.

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Milk production has been moving up this year, with production 2.6 percent higher in August. For the year, Cropp is forecasting production to be up 1.2 percent from 2012.

"Higher milk prices and lower feed costs have greatly improved margins and dairy producers are responding," Cropp said.

With a sluggish economy, domestic sales are down 0.4 percent for 2013. Conventional milk demand is down 2.7 percent but organic milk sales are up 4.7 percent. Cheese sales are up, but butter sales are down 1 percent.

Export sales have been strong. Cropp projects that 16 percent of U.S. milk production will be exported in 2013. The United States, the world's third-leading dairy exporter, sells to 155 countries with the biggest buyers Mexico, Canada and China.

"Exports provide great opportunities for improved prices but also can result in great volatility if we lose export markets," Cropp said.

In 2009, economic uncertainty brought a reduction in exports and a disastrous milk price.

U.S. producers are very competitive with Europe and New Zealand for butter, cheese, skim milk powder and dry whey prices, Cropp said.

He expects 2014 prices to be lower than 2013 but still at profitable levels. With lower feed costs and continued favorable margins, the average number of milk cows is likely to increase by 0.5 percent and milk per cow will be up by at least 1.3 percent.

Heforecases total milk production to increase 1.8 percent. Slow growth in the U.S. economy will result in slow growth in domestic dairy sales.

Milk production for New Zealand and the European Union, the world's two largest dairy exporters, is expected to increase. That will reduce U.S. exports in the second quarter of 2014. Cropp projects 2014 Class III prices ranging form a low of $16.80 in March to a high of $17.90 in October. The U.S. all-milk price will range from a low of $18.60 in March to a high of $19.70 in October.

"A $17 Class III price with lower 2014 feed costs will be a profitable margin for most dairy producers," Cropp said.

It's hard to say when Congress will complete work on the 2013 farm bill, Cropp said. It could be that there will be a one- or two-year extension. If there is no farm bill, dairy policy reverts back to the permanent 1949 act with a milk support price around $39. The U.S. dairy export market would crash, dairy imports would skyrocket and consumer milk prices would soar if that happened.

"That would be disastrous, but it's not likely," Cropp said.

If farmers don't want to hedge with Class III futures or cash forward contract with milk plants, they may want to consider a put option as a risk management strategy. Cropp advises protecting feed prices as well.