At USDA’s 2012 Agricultural Outlook Forum last week, one of the agency’s dairy analysts had a sobering outlook for the dairy industry.

“2011 was a great year for most dairy operators, but unfortunately I have to talk about 2012,” said USDA economist Milton Madison. First, producers are building their herds, which will expand production for the second year in a row and is expected to lead to a nine percent drop in milk prices.

Last year, the average dairy operation had net cash farm income of $240,000. “For 2012, we’re expecting a 26% decline in net cash farm income, down to $175,000,” said Madison. That’s the bad news. The good news is that it’s still better than average. “If realized, this would be the third highest net income since 2007. But certainly quite a drop from last year.”

With corn prices expected to be almost 20% higher this year and lower milk prices, Madison says dairy producers should be prepared for a challenging year.