Although milk prices in 2011 are forecast to remain near this year's level, higher feed prices are expected to squeeze producer margins, impacting the size of the dairy herd in 2011, according to the USDA's Economic Research Service Livestock, Dairy, and Poultry Outlook released late last week. The U.S. dairy herd is expected to advance to 9.155 million cows next year, up about 0.4 percent from the 2010 projected average. However, during the year, incentives to expand the herd will diminish.

Milk per cow is also expected to advance, rising to 21,405 pounds, up 1.3 percent from this year's expected output per cow. Growth in milk per cow is expected to slow as higher feed prices take hold. The result for the year will be nearly a 1.7-percent rise in milk production in 2011 to 196 billion pounds.

Corn prices, which averaged $3.55 per bushel last year, are forecast sharply higher in the 2010/11 crop year. USDA has recently lowered corn production and ending-stock forecasts. Prices are expected to average $4.60 to $5.40 per bushel in 2010/11. In contrast, soybean meal prices are not expected to differ much in 2010/11 from last year. The soybean meal price is forecast at $290 to $330 per ton this year compared with $311 the last crop year. The expected higher corn price will push the benchmark 16-percent protein mixed-dairy ration over $8 per hundredweight in 2011, up from about $7.30 in 2010.

Domestic demand for dairy products, cheese especially, has been firm through 2010, and demand is expected to remain strong into 2011, at least in the first half of the year. Domestic commercial use on a milk-equivalent fats basis is projected to finish 2010 at 1.4 percent above last year and forecast to rise another 1.6 percent in 2011. On a skims-solids basis, domestic commercial use is expected to finish 2010 nearly 1 percent below 2009. However, commercial use is forecast to snap back in 2011, rising nearly 2.5 percent above 2010. The relative strength of commercial use on a fats basis is a result of strong cheese demand moving much of the added milk production to cheese production this year. Meanwhile, butter production has lagged last year's levels every month until August when butter production edged ahead of year-earlier production. Butter production is likely to recover into next year due to additional milk production and favorable prices.

Relatively strong demand for dairy products in both 2010 and 2011 should be countered by continued rising milk production to keep milk prices near current levels into 2011. Cheese prices are expected to average $1.550 to $1.560 per pound this year. Continued firm cheese demand could strengthen prices somewhat further in 2011. Next year, cheese prices are expected to average $1.540 to $1.630 per pound.

Butter prices are expected to moderate in 2011, as increased milk production should make more milk available for butter and powder production. The butter price is expected to average $1.720 to $1.750 per pound this year and $1.505 to $1.625 per pound in 2011. Nonfat dry milk (NDM) prices are forecast higher in 2011, as domestic demand improves and exports remain firm.

All-Milk Prices are expected to average $16.45 to $16.55 per hundredweight in 2010 and remain about the same next year, averaging $16.00 to $16.90 in 2011. Class III milk prices are expected to average $14.65 to $14.75 for 2010 and climb slightly to $14.50 to $15.40 per hundredweight next year. Class IV prices could drop a bit, averaging $15.10 to $15.30 this year and $14.35 to $15.35 next year.