National weather forecasts issued Thursday didn't do much to dampen the outlook for continued high dairy prices in the months ahead.
The federal government said drought conditions are expected to continue in California amid growing concern that the situation will force dairy farmers there to cut back on production as feed prices soar.
California is the top milk-producing state in the nation. Wisconsin ranks second.
Drought conditions in the U.S. are being watched carefully by everyone from farmers to food manufacturers and grocers as prices for staples such as beef and cheddar cheese creep higher amid concerns about the dry weather.
Dairy-related businesses represent a $26.5 billion piece of Wisconsin's economy -- nearly 10 percent of the state's total output of goods and services.
The drought in California is "something we are watching very closely," said Tim Preuninger, chief financial officer at Gehl Foods in Germantown, Wis. "If they slow down on milk production, given the (global) demand that's out there, it could lead to some significant increases on an already high dairy market."
Gehl Foods manufactures a variety of dairy-based food products.
The drought could drive up feed prices sharply in California. Areas in the state where forage crops are typically grown to feed cattle may not produce much this year.
That could cause producers to sell animals because it costs too much to feed them. So far, that hasn't happened.
"Milk production has been hanging in there in California, but obviously the drought, if it continues to intensify, feed quality is going to be affected, cull rates are going to be affected. Break-even points for farmers could be affected," Preuninger said.
"Everything in the dairy business is pretty expensive right now," he added.
HighGround, based in Chicago, expects milk prices to continue at or near record highs, Eric Meyer, president of the firm's dairy division, said in a report Thursday.
"Unless there is major herd expansion in the coming months and stunning production gains, we have a hard time seeing prices falling below the mean for the foreseeable future," according to the report.
Producers need those higher prices, said Greg Glisczinski, senior vice president and agricultural loan officer at the Citizen's State Bank of Loyal branch in Neillsville, Wis.
"Even though the prices the producers receive are at or near an all-time high, so are expenses," he said. "They are going to need that income to keep up with ever-increasing costs, with feed being the driver there. It's a major expense."
Meanwhile, as the spring planting season looms, pieces of southern Wisconsin are now considered "abnormally dry" based on the amount of precipitation that has fallen in the past 90 days, according to information released Thursday from the U.S. Drought Monitor. Abnormally dry is the least severe classification used by drought forecasters.
And another forecast, released Thursday by the National Weather Service, says there is a moderate risk for flooding this spring across the Great Lakes region.
While there is uncertainty about what spring will be like in other parts of the country, the forecasts agree that the drought in California will continue without much relief in sight.
Even with higher prices, farmers appear to be reluctant to expand production, according to the Dairy Situation and Outlook report issued by the University of Wisconsin-Madison this week.
"Many producers are still recovering financially from the very depressed milk prices experienced in 2009 . " the report said. "So rather than expansions of dairy operations, some producers are paying off accumulated debt."
"Also dairy producers may be more cautious on expansions, recognizing the milk prices will not stay at record levels forever and feed costs can increase again," the report said.