Last month, I wrote about how the U.S. dairy market is in a Goldilocks period: production is weak and demand is not great, but it is good enough to keep milk prices at profitable levels given the poor production. Due to a lack of replacement heifers and avian influenza, it might be hard for the industry to boost milk production despite the profitable margins. Under those conditions, no news is good news, and frankly, I don’t have much news or analysis to share.

U.S. milk production for July was down 0.4% from last year, which was close to my forecast of a 0.5% slip. The biggest surprise in the report was a big revision to June production from being down 1% to being 1.7% lower. USDA also revised the size of the dairy herd in June by 15,000 fewer head, which put the herd down to the lowest level in nearly four years. They did estimate that the herd grew 5,000 head between June and July, but they have showed the herd expanding for the most recent month in the previous two Milk Production reports only to revise it back down in subsequent reports, so I’m cautious about reading too much into the July data point yet.

Milk production per cow did improve from being down 0.9% in June to down just 0.1% in July. We were discussing very weak production in California last July, which made for an easier comparison. Also, milk production per cow has now rebounded in some of the states that were hit early with avian influenza. I think it is also worth pointing out that feed costs have shifted significantly lower, and we could be seeing some adjustments in rations to take advantage of the lower input prices.

One thing that should be mentioned is that components in milk continue to climb. We have been tracking and reporting this over the last nine years. While components are not reported in the USDA Milk Production report, we are able to get this data from the USDA Agricultural Prices report and the Federal Milk Marketing Order pooling data. While the “headline” milk production number in the Milk Production report has been below year-ago levels for the past 13 months, once you adjust for the growing fat and protein content of the milk, our component-adjusted production has been positive in 12 of the past 13 months. This is allowing cheese and butter production to grow despite the decline in “headline” milk production. For instance, while headline milk production for July was down 0.4%, component-adjusted production was up 1.4%.

Can we adjust?

So, what does this all mean for the future, and how long can this Goldilocks period last? Frankly, it is hard to say. Given how good farm level margins are, my models say the herd should be expanding and we should see continued improvement in milk production per cow through the first half of 2025. We know heifers are tight and may limit the ability for the herd to expand, but there are plenty of closed herds that aren’t dependent on buying heifers. There are also a few large greenfield farms that are being built, and we expect that they already have a plan to source cows. While U.S. cow numbers are still trending down, Texas has added 18,000 cows since the start of the year in anticipation of the new cheese capacity that is being built in the region. So, yes, heifers do look like a constraint, but it is still possible we could see the national herd start to build (or at least stop declining).

Avian influenza will probably still be a drag on milk production per cow in coming months. With that said, the spread looks like it has slowed down. The only new state to report an infection since early June was Oklahoma, but the samples were taken in April and not sent in until late June. There haven’t been any confirmed infections in new states in nearly three months, and most of the new reported cases have been in a single state (Colorado). There is a push underway to sample bulk milk at processing plants nationally to determine how widespread the virus is, and depending on those results, we may find it is more widespread than the farm-level testing suggests.

I’m mildly optimistic that milk production growth can improve from current levels, either through a steady (or larger) cow herd, some mild improvement in milk per cow, or through higher fat and protein levels. The CME futures continue to point toward $20-plus per hundredweight milk through the end of the year, and with corn futures below $4 per bushel, that works out to really good margins. At these margin levels, farmers usually find a way to boost production and take advantage of those additional profits. However, a small improvement in milk production might still leave us in a balanced market with continued good margins.