Aug. 20 2012 06:30 AM

Much higher milk prices are about to arrive for beleaguered dairy farmers.

It's easy to be pessimistic when times are as bad as they are this year. It's also easy to focus on dark clouds so hard that you don't notice when a glow finally appears on the horizon.
Not only is a glow already visible, it's about to get brighter in the form of $20+ milk prices that should last for a while.

Class III futures for fall and winter months are already soaring. On May 1, prices for the second half of 2012 averaged $15.80 per hundredweight. On August 10 they averaged $18.73 and every month from September to January was over $19. Dairy forecasters tell us they expect some individual months to go $2 or $3 higher.

A few key factors will dictate how high they go and for how long, but they will go up for one simple reason: Less milk.

The drought and heat stress will continue to take a toll on cow health, production and reproduction. In addition, some degree of situations that are already occurring may continue until next summer:

• Tight feed supplies, even higher prices, producers cutting back on ration quality and cows making fewer pounds of milk per day.
• Dairies running out of feed, being unable to borrow more from lenders and being forced out of business.
• Even higher cull cow prices after the beef industry's current drought-driven surge leaves the supply pipeline, which will encourage even more dairy cows to be culled.

The net result will be fewer cows, less milk per cow, less total milk and higher milk prices.

There are, however, some caveats to this rebound scenario, including:

• In order for $20 milk prices to help, dairies have to hang on until they arrive. Not all of them will.
• Because feed prices are already at record highs and could rise even more, will $20 milk be enough for producers to break even?

Breaking even doesn't mean making a profit. It may mean surviving another near-fatal market down cycle, but is it enough to encourage dairies and their lenders to keep on going?