Why are dairy prices spiking?

It's shaping up to be a historic year for America's economically important dairy industry.

At the end of August, decades-old dairy price supports will change as the federal government ends its milk income loss contract (MILC) program. MILC guaranteed compensation for dairy producers if domestic milk prices fell below a certain level.

But dairy producers haven't had to worry too much, at least for the present, about milk prices falling.

Despite a smaller overall beef and dairy herd, due in part to historic drought conditions across parts the U.S., the nation's milk output is expected to reach a record 206.1 billion pounds this year, up nearly 5 billion pounds from 2013.

Dairy prices have also spiked. "We've never seen dairy prices and milk production this high at the same time," Robin Schmahl, a commodities broker and owner of AgDairy in Elkhart Lake, Wisconsin, told AgWeb.com back in April. "For dairy producers, the futures looks brighter than it has for a long time."

For now, consumers appear to be taking the higher dairy prices in stride, as the cost of many staple foods also go up.

"You're not seeing as many 'Oh, my god, milk is at 3.50 or $4 a gallon. It's more expensive than gas!'" Chris Galen, with the National Milk Producers, recently told AgInfo.net.

"Usually that has been the case, that milk's been more expensive than gas and, you know what, you usually don't buy 15 gallons of it at a time," he added. "We're not seeing as much of that 'fear mongering.' The other thing that has happened is that other major farm products are also at record highs."

Meanwhile, although U.S. domestic sales of milk have fallen in recent years, international demand for milk and other dairy products has skyrocketed.

According to the latest annual Sustainability Report for U.S. Dairy, published by the Innovation Center for U.S. Dairy, dairy exports now account for 15.5 percent of total U.S. milk production, due to increasing demand in China and other Asian countries.

The report notes higher milk prices, along with lower feed costs during the second half of last year, also helped many dairy farmers recover from the recent recession.