With weak demand for block cheese and butter, December's Class III milk prices fell a lot and Class IV milk dropped a bit. And, it doesn't bode well for 2012 dairy income, suggests Jim Dunn, Penn State dairy economist. Here's a summary of his dairy price outlook released last week.

Class III milk futures price is $18.71 per hundredweight for December 2011. This will put the average Class III price for all of 2011 at $18.36, or $3.95 higher than 2010.

PA dairy income over feed costs

Class IV milk futures are now $17.05 for December 2011, making the 2011 average $19.06 – $3.98 above 2010 average. Together these values imply a Pennsylvania all-milk price for December 2011 of $21.07, down $0.63 from November. For all of 2011, the average price is $22.06, up $3.77 over 2010.

What's ahead for 2012

The forecast for all-milk prices for 2012, based on the futures prices, imply a PA all-milk average price of $20.14 for 2012. That's $1.92 less than 2011.

Of course, high feed costs will squeeze 2012 margins – and net dairy income. Anecdotal evidence is the current basis for corn buyers is very high.

Corn and soybean markets have moved sideways for the last month. March corn contract is now at $6.01 and January beans are at $11.37. Both are down slightly from a month ago. Soybean meal futures did the same, with January meal futures at $293 per ton. USDA's supply and demand estimates show very minor changes from December meal.

Penn State's measure of income over feed costs fell to $8.63 per cow per day for December. Income over feed cost reflects daily gross income less feed costs for an average cow producing 65 pounds of milk. Given the lower milk prices ahead, income over feed cost will be falling, perhaps by a lot.

The shortage of corn, particularly high-quality corn, is becoming an issue.  All feed ingredients face quality issues because of 2011's challenging growing season weather.

For Dunn's full report, click on dairyoutlook .