The recent rally in the spot nonfat dry milk (NDM) market is welcome news to dairy producers, but the rewards of the price increase won’t be felt equally. That’s because Class III and IV milk prices have diverged dramatically. At the end of the day on May 7, the May 2026 Class IV futures contract was $5/cwt. higher than the June 2026 Class III contract.
In June 2020, when USDA’s Food Box program was active to combat food supply issues during the Covid pandemic, Class III futures were $8.14/cwt. higher than Class IV contracts, but this month’s difference between Class IV and Class III is the highest ever.
“Typically, when one Class of milk has a sizable price advantage, depooling occurs if it is advantageous for the handler,” said Betty Berning, analyst with the Daily Dairy Report. “For Class I processors, who must pay the higher of the Class III or IV price and who cannot depool, this adds to their costs.”
The all-time high for the Class IV price was set in March 2022 at $24.82/cwt., still more than $2/cwt. above May and June 2026 futures. However, the sizable spread between Class III and IV futures makes it advantageous for some Class IV processors to depool to receive the higher Class IV value of the milk, rather than the lower blend price from the pool.
“In other words, the large gap between Class III and IV prices could not only negatively affect producer milk checks in cheese-centric federal orders, such as the Upper Midwest, where not a lot of Class IV milk is pooled, but also for producers who are not members of co-ops in orders where Class IV processors depool to take advantage of record-high nonfat dry milk prices,” Berning noted.
The Class I base price for May, which was determined by spot prices in late March and early April, was recently announced at $20.15/cwt. That price was below the current May 2026 Class IV futures contract, indicating that producers could face a negative producer price differential (PPD), she said. A negative PPD is basically a deduction taken from a dairy producer’s milk check that occurs when the component values of milk exceed the classified market value of all milk pooled in a federal order.
In the California federal order, the impact of depooling is already evident. In March, 1.82 billion pounds of milk were pooled in the order, compared to more than 3 billion pounds in March 2025, Berning said. In March 2025, 40% of California’s pool was Class III milk, and 44% was Class IV. However, in March 2026, Class III utilization was 68%, and Class IV was just 3%, highlighting the current depooling occurring in the order, she said.
Whenever dairy markets rally, depooling can occur, Berning said, and that can give way to negative PPDs. Thus, she added, when USDA announces its advanced milk prices on May 20 and the All-Milk price on May 29, analysts and producers alike will be watching to see just how big the impact will be on Class I, II, and IV processors as well as on dairy producer profitability.
