We expect a good year for dairy farmers, much welcomed after a long period of negative margins in 2023 and into last year. While recent milk checks weren’t as strong as September’s $23.34 per hundredweight Class III settlement and $22.29 Class IV price, still healthy prices combined with sharply reduced feed costs should create profitable margins for most farmers throughout this year.
Global Milk Supply Trends
Globally, the second half of 2024 marked a turning point for milk supply growth across the Big 7 export regions. Year-over-year production gains were around 0.5%, offsetting the 0.5% YOY decline in 2H 2023. However, volume growth is not expected to overwhelm the global market. RaboResearch forecasts milk supply growth of 0.8% in 2025.
U.S. Dairy Production Insights
In the U.S., November milk production declined 1% versus the prior year, breaking a streak of three straight months where year-over-year gains were realized. The decline was driven by the avian influenza outbreak that is ravaging California; the state showed a 9.2% YOY output decline. While California sees challenges, RaboResearch expects US milk production will increase this year after three straight years of stagnation. Higher milk production coupled with strong components should drive an increase in product output, opposite the 1.7% cheese production decline noted in November. Butter production continued higher though, with output up 4.4% year-over-year, but nonfat dry milk/skim milk powder production fell 10.9%, yet again aligned with the year-to-date trend of weaker output.
Understanding Demand Dynamics
From a demand standpoint, domestic dairy disappearance slipped lower year-on-year in Q3 to mark the first quarterly decline since Q2 2022. However, cheese shipments were higher, year-on-year, in each month through November and likely showed a close to 20% increase versus 2023. Nonfat dry milk exports were weaker in 2024 regardless of a strong Q3, but lower production has kept the price supported, offsetting the lower demand from our global customers.
Political and Economic Considerations
The new administration is a key watch factor. Threats of tariffs and subsequent potential retaliation could negatively impact export markets and hurt prices. The threat of mass deportations could disrupt farm labor availability. On the flip side, full Republican control in DC could allow a new, multi-year Farm Bill to more easily pass, ending the increasingly common practice of passing extensions instead of a new bill.
Throughout this year, Class IV will likely maintain its premium over Class III, with averages likely high enough to drive positive farmer margins. A shining point is more affordable feed costs, which will likely be the lowest in several years. While there are risk factors brewing that could negatively impact prices in the coming months, the seasonal outlook looks acceptable for the time being.
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