The U.S. dairy market seems to be in a Goldilocks period. Relatively weak production is matching up with relatively weak demand to keep milk prices at good levels, while lower feed costs are boosting margins for dairy farmers. I don’t know how long this will last, but let’s walk through the situation.
USDA just released the June Milk Production report, and headline U.S. milk production was down 1% from last year, which was a little worse than the 0.7% drop I was forecasting. However, the fat and protein in the milk are still running well above last year, so if we look at it on a component basis, production was up 0.7% from last year. Still, that is slower than normal growth. I’ve been expecting the dairy herd to flatten out with slaughter that has been running 15% to 20% below last year, but USDA estimates that we lost 13,000 milking head between December and June. We still haven’t slowed slaughter enough to match the lower heifer supply.
Milk production per cow has also been weak, down 0.3% from last year in June. Highly pathogenic avian influenza is still spreading in the dairy herd and has caused a drag on yields. The confirmed number of cases has continued to trend higher during July, but most of them have been in Colorado with very few reported in other states. This suggests that the spread might be slowing down. However, it is very hard to say with testing still mostly voluntary.
For at least a few more months, the dairy herd is likely going to be stuck below year-ago levels, and milk production per cow will likely still be weak. We are still seeing good growth in milk components, which is leading to more cheese and butter production, but demand has been sufficient enough to absorb most of the higher production.
The other side of the equation
The demand side has been a mixed bag. About half of milk goes into cheese, so it has a big impact on the overall demand story. Domestic cheese demand started the year weak, down more than 3% year-over-year in January and February, but rebounded to about 1.3% growth in March, April, and May. Cheese exports have been exceptionally strong and are setting new record highs, with shipments to Mexico going parabolic. So, domestic plus export sales of cheese year to date are up 1.1%, which is slower than the long-run average of 2.5%.
Domestic butter demand has also been volatile, up strongly in January and May but down sharply in February and April. The good news is that year-to-date domestic butter disappearance is up 2.9% despite the record-high price for the first five months of the year. However, U.S. butter has been expensive compared to the other major exporters, so exports are down 19.2% so far this year, which drags total disappearance down to just 2.1% higher year to date, just above the long-run average.
When we look at the powders, demand is also mixed. Both domestic and export demand for nonfat dry milk and skim milk powder is down, which puts total disappearance down 20% so far this year. However, demand for whey products has generally been good, with 2024 total sales of dry whey up 4.5%, low protein whey protein concentrate (WPC) down 5.5%, high protein WPC up 13.3%, and whey protein isolate up an amazing 72%. When I net everything together and put it onto a milk-equivalent basis, domestic sales are up 1.6% year-to-date, while exports are down 1.2%, which leaves total sales up 1.1%. Again, that is weaker than the long-term average growth, but it is matching up well with the weaker than average milk production growth.
The well-balanced dairy market is pushing milk prices into the $20 to $22 per hundredweight (cwt.) range. When you combine that with feed costs that are down more than 20% from last year, margins for dairy farmers look strong in the second half of 2024 and early 2025. When we’ve seen margins like these in the past, they resulted in stronger milk production, which eventually pushed dairy prices lower. While we are facing headwinds for both expanding the herd and improving milk production per cow, I believe market forces will eventually overcome the headwinds, and we’ll see stronger milk production growth. The Goldilocks conditions won’t last forever, but I think the market will stay relatively balanced into September or October.
