Milk prices have been on a bit of a roller coaster ride this year, and the ride doesn’t seem to show signs of slowing down. After slight signs of strength earlier this spring, Class III prices have moved lower in recent weeks, leaving many producers wondering what changed so quickly. During a recent episode of AgriTalk, dairy market analyst Mike North with Ever.Ag says the answer lies in a combination of softer cheese prices and an industry that continues to produce more milk, more components and more beef than ever before.
Cheese Leads the Downturn in Class III
North points to cheese as the primary driver behind the recent slide in Class III milk prices.
“Every penny move in the value of cheese has about a 10 cent impact on the value of Class III milk,” he says.
When cheese prices weaken, Class III milk prices typically follow. In recent weeks, cheese prices fell 19 cents, a move that translated into roughly a $1.90 decline in Class III milk. Whey prices slipped another 2 cents, trimming about 10 cents more from the market and helping push the June Class III contract down more than $2 in just a matter of weeks.
However, North emphasizes the market story is not demand erosion.
“We don’t have a demand problem for cheese,” he says. “We just have to make sure we keep the price low enough that we clear all the volume necessary to fulfill that demand and keep the warehouses in balance.”
The challenge, he notes, is moving a large supply of product through both domestic channels and export markets without letting inventories build.
Production Continues to Outpace Expectations
While weaker cheese prices have contributed to lower Class III values, growing milk supplies are adding pressure as well. The latest USDA milk production report showed output increased 2.8% compared to a year ago, extending a period of steady expansion across much of the dairy industry.
North describes the pattern as persistent rather than temporary.
“16 months of growth, 16 months of seismic growth in some case,” he says.
Growth is uneven across states, but still widespread. Kansas is up 24% year-over-year, and eight of the top 23 dairy states are running at 4% growth or higher.
The oversupply is not just more milk in the tank. It is also more components.
“We’re not just talking about fluid milk growth,” North explains. “Fat and protein tests have increased significantly over the years, and we’re going to continue seeing cows produce more fat and more protein than ever before. The genetics are there to support it, along with the management and feeding practices we see on today’s dairy farms.”
Beef Revenue Now a Major Income Stream
One of the biggest changes on farms in recent years has been the rapid expansion of beef-on-dairy breeding. According to North, the trend is doing more than creating another revenue stream. It is also influencing culling decisions and helping keep cow numbers elevated.
“Cow numbers have continued to grow right alongside the productivity we see on a per cow basis,” he says.
Strong calf prices have altered the economics of keeping cows in the herd. North notes that producers now have an incentive to retain animals that may have been culled in the past because of the value of their offspring.
“When I can breed one of my cows in my dairy barn to a black Angus sire and put a black hide a calf on the ground and get paid $1,500 for a three day old wet calf, I’m going to keep that cow in the barn even if she’s not my top performer,” he says.
As a result, beef-on-dairy has become a factor in both herd expansion and milk production growth. North expects dairy producers to remain an important part of the beef supply chain for years to come.
“I think the dairyman is going to play a big role in the beef space for a very long time. In fact, I would say indefinitely into the future,” he says.
The impact is also showing up on the balance sheet. North says beef revenue has become a much larger contributor to farm income than it was just a few years ago.
“Beef revenue right now has moved to a place today where it’s $5 to $5.50 in what we would call per hundredweight milk revenue equivalents,” he says. “So we’ve watched beef revenue on the farm triple, in some cases quadruple, from where it was just four years ago.”
That growth has helped offset some of the pressure from softer milk prices. North says the additional income is creating new opportunities for producers, particularly as margins tighten on the dairy side of the business.
“It’s creating massive opportunities there for dairymen, especially if they’re feeling a little bit of pinch on margins in what I’ll call the pure play around dairy profitability,” North notes.
Profitability Cools, but the Long-Term Outlook Holds
Recent profitability data from Farm Journal’s State of the Dairy Industry Report shows a 28% decline compared to last year’s highs. North says that decline fits the pattern of the market cycle.
“As we came into that February period, we were among our lowest Class III announcements,” he explains. “We were in a bit of a dark cloud for a moment. We had tons of production and we were headed towards spring flush, so milk prices were low.”
Since then, some demand channels have improved. Nonfat dry milk strength, in particular, has supported protein values and helped stabilize cheese and butter pricing. North also points to longer-term margin benchmarks using Dairy Margin Coverage calculations.
“If you look at longer-term benchmarks, the five-year average for that margin formula is $9.16 per cwt., and the 10-year average is $8.95,” he says. “The projected 12-month average is about $11 right now, so we’re running above both of those. And then you still have to add beef revenue on top of that.”
Feed, Labor and the Second-Half Setup
As the year moves forward, North says the direction of profitability will hinge less on whether milk has already moved lower and more on how supply, demand and costs settle into balance through late summer and fall. Fortunately, a large portion of feed costs are already locked in, which removes some volatility from the expense side for many farms.
“A lot of the feed cost for most dairymen is going to be baked in already from things they bought last year,” he says. “This is really going to start to take root as we get into late summer, early fall.”
Corn silage harvested this year, along with hay and protein decisions heading into winter rations, will shape the cost structure for next year’s milk production. If feed markets remain relatively stable, the margin outlook shifts more toward milk price recovery and strength in beef revenue rather than cost relief.
While feed costs are one piece of the margin picture, labor remains another area where pressure continues to build. North notes that higher wages and tighter labor availability are still working through farm budgets, and those costs are not showing signs of easing.
“There’s no doubt labor has come up, we’ve seen it everywhere, and that has definitely had an impact on bottom lines,” he says.
Demand, Beef Revenue and Production Shape the Outlook
There is still room for the demand side of the dairy equation to improve as the year progresses. Cheese markets remain closely tied to export movement and the typical drawdown of inventories following seasonal production peaks. If stocks return closer to balance and export channels stay active, even modest gains in demand could have an outsized influence on Class III direction.
Beef-on-dairy continues to function as a second revenue engine for many operations. Even with milk prices moving in a choppier pattern, strong calf values are helping stabilize income, particularly for farms that have fully built beef breeding into their reproductive programs.
“The mover in all of this is going to be top line, it’s going to be revenue,” North says. “Between what we’ve just come off of in terms of milk price opportunity… and what we have in beef revenue, a lot of producers are sitting in pretty decent situations today.”
Looking ahead, the dairy outlook is no longer shaped by milk price alone. Profitability now reflects a combination of components, production levels, beef revenue and the timing of costs. As the second half of the year unfolds, the interaction between those factors and overall demand strength will determine how well margins hold as supply continues moving through the system.
