An unusual string of 13 consecutive months with U.S. milk production falling below year-earlier levels ended in August, and a 16-month streak of U.S. dairy cow numbers being down from a year ago ended in October. This suggests that the U.S. dairy industry has returned to some level of expansion mode.

Meanwhile, an average Dairy Margin Coverage (DMC) margin of $11.61 per hundredweight (cwt.) during the first 10 months of 2024 has likely fueled this change, helping overcome the headwinds of scarce heifers, costly facility construction costs, and the recent bout of inflation affecting many other dairy cost items that have kept U.S. milk production flat at about 226.4 billion pounds for the past three years.

A muted outlook

What might a return to expanding milk production do to milk prices this year? How might it affect the supply and demand balance, given how frequently episodes of production growth have tended to overshoot demand growth in the past? One suggested answer to these questions is a weaker price outlook.

From October through December in its monthly World Agricultural Supply and Demand Estimates (WASDE) reports, USDA has steadily dropped its forecasts of this year’s U.S. average All-Milk price by 90 cents per cwt. while raising its 2025 U.S. milk production forecasts. As of mid-December, CME dairy futures indicated that the average All-Milk price this year would be about 35 cents per cwt. higher than last year’s average. However, there is more than an even chance that this year’s futures-based price outlook will recede further.

Much of any elevation in milk production will likely be channeled into new cheese processing capacity coming online. Lower forecasted cheese and butter prices have driven the WASDE’s reduced 2025 milk price outlook over the past few months. While, as of mid-December, the DMC Decision Tool on USDA’s Farm Service Agency website had not been updated with its DMC margin forecasts for this year, CME futures indicated that 2024’s large drops in the DMC feed cost formula components will not be repeated this year and that any significant DMC margin changes this year will be driven mostly by changes in the All-Milk price.

A closer look at demand

Total demand for dairy products, both domestic and exports, has risen during the recent years of flat milk production. U.S. dairy farmers have been able to keep that demand growth supplied due to the improving average component composition of their milk, which is the least expensive way to increase supply.

Richer milk composition first became apparent in 1998 for nonfat milk solids and then in 2011 for milkfat. This trend has actually made it trickier to pin down how much total dairy demand has climbed. For example, USDA’s Economic Research Service reports data showing that total domestic utilization of milk in all products rose 14% between 2013 and 2023 when measured as milk equivalent on a milkfat basis but by 25% when measured by milkfat consumption itself.

Dairy market analysts have been increasingly commenting on the various issues posed by raw milk’s growing component composition. It is important to build industry support for USDA’s National Agricultural Statistics Service to begin reporting milk solids production in its monthly Milk Production report rather than scattered throughout other USDA reports and also for USDA’s World Agricultural Outlook Board to add forecasts of milk solids production and demand to its WASDE reports. At last year’s Federal Milk Marketing Order milk pricing hearing, Cornell University professor Mike Van Amburgh testified as an expert witness that both Holstein and Jersey cows continue to “have tremendous capacity for milk component yields,” which should keep this issue current for many years to come.

Plus federal order changes

This year will also include the likely mid-year implementation of the largest comprehensive update to the federal order pricing formulas since order reform in 2000.

The National Milk Producers Federation (NMPF), through the work of dozens of marketing experts and dairy producers from its member cooperatives, led the effort to accomplish this long-overdue project to bring the order pricing formulas into closer conformity with how the industry has changed since 2000. NMPF was successful in establishing several basic principles that enabled modernization and will also help in crafting future updates as the dairy industry’s structure continues to change.

Besides reaffirming the more traditional principles of aligning the component pricing formula make allowances with current product manufacturing costs and the Class I differentials with current costs of supplying milk to fluid milk processors, USDA’s final decision establishes the principle that the class price skim milk component composition factors need to be adjusted to keep current with the recent component composition of producer milk and that the component pricing formulas should use only a single basic commodity product, as effectuated by the barrel cheese decision. The full package of changes would, on balance, give a short-term boost to prices before market forces adjust, reestablishing prices closer to baseline levels. However, the six-month delay in raising the skim milk component composition factors will likely keep this effect, at best, relatively muted during this year’s second half.

In total, while this year’s outlook includes relatively few upside forces, neither does it currently contain indications of significant deterioration from last year’s situation.