The author is a senior dairy analyst with Terrain.

As the dairy industry moves through the spring flush, we find ourselves wondering where the bottom will be for milk prices. We would also like to know whether the more optimistic futures prices in the second half of the year represent an opportunity to secure favorable prices.

Class III milk prices have had a rough start this year. March posted the highest price so far at $16.34 per hundredweight (cwt.), but April seems poised to fall back into the mid-$15 range. Class IV prices have fared considerably better, but Class IV is less impactful for most producers, especially if that higher-valued Class IV milk is opportunistically depooled.

The good news is that markets look ready to improve from here. April will be another tough month for milk prices, but beyond that, futures are showing about a $3/cwt. improvement from current levels.

The higher futures prices in the second half of the year may or may not be enough to offset the challenges of the first few months, depending on the individual operation. But look for jumps in the market as opportunities to lock in prices, at least partially, because sustained price strength is not guaranteed.

The milk supply is tight

Stagnant milk supply continues to be supportive of prices but is not enough on its own to provide sufficient profitability. Milk production reports continue to come in with negative year-over-year (YOY) numbers. Through the first quarter of 2024, milk production was down 1% from the same quarter last year. Cow numbers are falling, and it’s no secret at this point that there aren’t many replacement heifers in the pipeline.

Dynamics in the beef market continue to be the primary factor driving the decline in cow and heifer numbers. Given the extremely high prices that dairy-beef cross calves are commanding at a time when dairy producers need additional revenue, it’s no wonder more calves are bred to beef rather than added to the dairy herd replacement pool. Even once dairy market conditions eventually turn around, climbing out of this milk cow deficit will take some time.

With low milk production and higher values pulling milk toward Class IV markets over Class III, cheese production growth has started the year below trend. Spot milk prices in the Upper Midwest suggest that inexpensive, surplus milk is not nearly as available to top off cheese vats as it was last year. Cheddar has been more sluggish than mozzarella, but combined total cheese production in the first two months of 2024 was down about 0.5% YOY.

Butter prices, meanwhile, have been on a steady climb all year, finally hitting the $3 per pound mark in late April. That price strength has enticed more milk to flow toward Class IV, with butter production climbing by 5% YOY during the first two months of the year.

While the butter price rally has momentum on its side, there is plenty of cream available to allay any premature worries about butter shortages by the holiday season. If that cream starts heading into ice cream in the summer months, then there could be more room for butter prices to climb.

Demand moves the needle

Tighter milk supply is good for prices, but demand is where we will really need to see strength to move prices higher. Luckily, there have been glimmers of hope on the export front.

Mexico, our primary destination for cheese exports, had a remarkable February, up 60% YOY. A strong peso to dollar exchange rate and favorable economy have helped maintain demand while many of our other export customers have struggled.

U.S. cheese prices are once again competitive in global markets. The U.S. has been priced below European Union and New Zealand levels for most of this year, a reversal from last year when the U.S. was priced out of many export opportunities. If this discount is maintained — preferably because of global prices moving up rather than U.S. prices scraping along the low levels they’ve been at — it bodes well for improved exports moving into the rest of the year.

Domestic consumer demand has remained healthy, though there are some signs of pushback against higher prices. Major food and restaurant companies have been reporting reactions against inflation, including McDonald’s, PepsiCo, and Kraft. Despite stubbornly elevated overall inflation, retail dairy prices are declining. Still, food away from home remains expensive and could continue to face headwinds.

A precarious balance

These combined factors suggest markets are in a precarious balance. April will hopefully be the end of sub-$16 Class III prices, but there are no guarantees we won’t face additional downward pressure ahead. When markets get a boost from some positive news, taking steps to manage downside risk is worth consideration.

Compared to last year, 2024 will be more of a challenge from an insurance and risk management standpoint. The calculated margin used in the Dairy Margin Coverage Program is projected to be near the highest milk minus feed margins since the program began. That doesn’t necessarily translate to record-high farm margins, since it doesn’t factor in interest expenses, labor, or many other realities on the farm. What it does mean is that insurance payments aren’t likely to be paid out this year. Meanwhile, markets didn’t come into the year in a particularly strong position, so producers haven’t had the same opportunities to lock in favorable Dairy Revenue Protection coverage that they did for 2023.

The rest of 2024 likely has a few more surprises in store. It will be a year to watch markets closely — not to try to time the markets or pick the peaks, but to take advantage of opportunities when they are presented.