It’s a fundamental tenet of supply-and-demand: What goes up must eventually come down. Yet, milk prices continue to improve despite higher milk production. 

On Friday, the USDA announced that May milk production in the top 23 dairy states had increased 1.5 percent compared to the same month a year earlier. It was the 16th straight month that an increase has occurred. 

Historically, milk prices begin to decline after 15 to 20 months of higher production. But this time around, higher milk prices seem to have staying power — buoyed by strong demand.

“Despite the strong increase in milk production, we have had strong usage,” says Greg Scheer, dairy analyst at Doane Advisory Services in St. Louis. “We have had very strong export demand and cheese use.”

In the first quarter of this year, January-March, cheese disappearance was up 6 percent compared to the same quarter a year ago, Scheer says. Some of that was due to domestic demand, but a lot of it was due to exports, he adds.

“A lot of the increased export demand can be attributed to increased purchases from China and Russia,” he adds. A weak U.S. dollar has helped these countries purchase more of our products.

Meanwhile, a spectacular rise in spot cheese prices on the Chicago Mercantile Exchange could push the Class III milk price above $20 in the near future. Read more.

The current situation “illustrates very nicely” that dairy product demand is a key driver of prices, says Dave Kurzawski, dairy analyst with FCStone/Downes-O'Neill in Chicago.

Demand will lead the way up and supply will probably lead the way down, Kurzawski adds.

In a report to clients, he called Friday’s milk production report “neutral.”

"We doubt that this report will have much, if any, impact come Monday morning" when the commodity markets open, he added.