The author is the dairy markets and policy outreach specialist at the University of Wisconsin-Madison.
The dairy market in 2024 has been characterized by a delicate balance between supply and demand. While recent prices have provided some relief, the outlook remains uncertain. There are signs that lower prices and tighter margins could be on the horizon, and any downturn could take time to recover from.
Supply dynamics
Last year’s low milk prices and tight margins resulted in a smaller milk supply. While demand has remained relatively constant, producers have reduced cow numbers and overall production.
The first half of this year saw a steady decline in year-over-year total milk production, leading to a market price climb since June. This gradual rise in the All-Milk price has provided some breathing room, with margins likely to remain steady for the rest of 2024. Nonetheless, price pressures could emerge in the longer term.
Processors have been investing billions of dollars in new or expanded facilities. The key questions here are what will happen when these additional products enter the market and whether the milk to supply these plants has been accounted for.
Recently, cheese prices on the CME touched new highs before retreating slightly. For much of 2024, the National Dairy Products Sales Report (NDPSR) has indicated that cheese buyers have been particularly price-sensitive. Cheddar cheese production was down 9% year-over-year in June. With lower production, buyer price sensitivity, and new processing capacity coming, there is a strong argument prices will need to soften to prevent inventory buildup.
This time of year, we typically see an increase in fluid milk consumption, accompanied by a seasonally stronger Class III spot milk basis in the Midwest. So far, basis has been trending positively, and if historical patterns hold, we could see a Midwest average spot Class III milk basis of $1.50 to $2 per hundredweight (cwt.) over class values.
It would not be surprising to see cow numbers start to rise later this year and early in 2025. Farmers have been holding onto cows longer, and by late winter and early spring, we may see planned herd growth come online. If this occurs, price pressures are likely to climb.
A potential offsetting factor is whether the milk supply for new processing facilities has already been allocated. To maintain healthy on-farm margins, these facilities would need to pull at least some milk from existing supplies. It is likely that the milk supplies will be sourced from a mix of already-planned growth in production and milk drawn from the existing market. The extent of this will be a key determinant of prices when this capacity comes online.
Demand considerations
Demand is a relatively stable picture, though there are underlying price pressures that could change the outlook. In 2024, exports have been booked at competitive prices. The strengthening cheese market in the European Union (EU) could disrupt this pattern for the U.S.
Domestically, consumer sales and deals have been driving purchases, but U.S. consumers are increasingly price-conscious. Food consumed away from home has been expanding in recent years, with dairy products, particularly cheese, reaping the benefits. However, any reductions in food expenditures or a shift to lower cost commodity products on grocery shelves, combined with greater dairy production capacity, could put downward pressure on prices in the future.
Bullish and bearish factors
There is a compelling case that milk prices will remain strong through the end of 2024. Dairy Margin Coverage (DMC) currently estimates margins to be above $14 per cwt. for the remainder of the year. Producers have been cautious in expanding cow numbers, and short-term supply responses are unlikely given the high beef prices and replacement costs. Dairy products continue to clear domestic and international markets, albeit at a modest pace. Continued strength in EU cheese prices could help maintain Class III prices above $20 per cwt. Absent any significant disruptions, milk prices above $20 per cwt. and margins above $14 per cwt. could be a reality for the remainder of the year.
On the other hand, medium- to long-term conditions could undermine these trends. More cheese production, the buildup of inventories, and less demand could create downward pressure. The market is already anticipating a slip in milk price six to nine months out. New processing and rising cow numbers will make it challenging for current demand to support existing prices. The next few months may be a good time for producers to consider longer term planning.
