Despite ongoing geopolitical tensions, economic uncertainty, and escalating tariffs, the past several months has been reasonably profitable for U.S. dairy farmers. They continue to benefit from adequate milk prices, elevated non-milk revenue, and lower feed costs compared to recent years. Overseas, particularly in the EU and New Zealand, many dairy commodities have seen prices surge in recent months, with some products reaching multi-year highs in mid-Q2, followed by slight price easing at recent GDT auctions. While similar price behavior has not been observed in the U.S., most products have at least established a price floor, keeping milk prices above on-farm production costs. As long as demand holds in the coming months, RaboResearch remains optimistic about the near-term future of the dairy industry.
Recent milk production data suggests that farmers have responded swiftly to capitalize on positive margins. Production was up 1.6 percent year-over-year in both April and May, the strongest growth since 2021. A larger herd, combined with improved yields (with only one new avian influenza case reported in the past 30 days), has contributed to this output strength. Despite a tight supply of replacement animals and the continued financial appeal of breeding dairy cows to beef bulls, farmers have managed to expand herd sizes to take advantage of favorable margins. The USDA revised the April herd size data upward by 15,000 cows and reported an additional 5,000 head were added in May, resulting in a net increase of 20,000 animals. At 9.445 million head, the herd size is now at its highest level since July 2021. 2025 is expected to deliver the first full-year production growth since 2021, with RaboResearch projecting an output gain of 1.5 percent to 2 percent over 2024.
Trade remains a double-edged sword. While exports to Mexico thankfully continue to flow freely under the USMCA, tensions with China have negatively impacted sales. U.S. dairy products faced a 125 percent retaliatory tariff increase from April through mid-May. Although the tariff has since been eased, the threat of re-escalation remains. Shipments of lower-protein dry whey and permeate to China fell 40 percent year-over-year in April and were down 70 percent in May. As China is the top destination for these products, such significant declines could lead to weaker dry whey and Class III prices in the coming months.
Looking ahead, RaboResearch anticipates a softening in global prices as milk production increases in most key exporting regions and demand remains fragile. To some countries, exports in some products could remain elevated as the U.S. remains price competitive, especially in cheese and butter. While the U.S. dairy sector remains generally healthy, it must navigate a complex landscape of shifting trade policies, inflationary pressures, and evolving consumer behavior to ensure continued profitability for dairy farmers this year.
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