U.S. milk output has been surging most of the year, bringing dairy prices to some of the lowest we’ve seen in years. USDA reports August 2025 saw an increase of more than 3% higher milk output than August of last year.
It is a perplexing issue with lower cow numbers. However, feed is cheap, and if there is one thing the American farmer is good at, it is creating efficiencies in every corner of their operation.
As a result of the abundance of milk supply, there have been new lows in nearly every sector of the dairy market — but most notably in butter, cheese and Nonfat Dry Milk (NDM). Butter fell below $2.00 per pound, something we have not seen in months, due to the higher cream supply and higher churning activity as of late.
Demand is steady domestically, but the supply of milk is more than we can use. Exports have been the bright light in the demand picture, as world demand is strong, but demand struggles to keep up with the national milk production rising the fastest pace we’ve seen in two years.
While markets struggle to find support, farmers have begun to adjust to the new changes in the Federal Milk Marketing Order (FMMO). It has been long awaited for the FMMO to get a new, modern facelift to reflect more of what we are seeing in dairy today by updating the old, outdated formulas. However, it did not come without costs for some farmers.
For others, such as farmers in the southeast, where fluid milk is usually a deficit in that region, the changes are favorable. For example, Class I Pricing has changed to the “higher-of” formula — which ties fluid milk prices to whichever is greater between Class III or Class IV. There have also been adjustments for location-specific premiums, which are meant to better reflect hauling and supply costs.
Processors saw a benefit in higher allowances for butter, cheese, nonfat dry milk and whey — which are supposed to reflect the updated manufacturing costs. Unfortunately for farmers, this translates into lower component values on their milk checks.
In the cheese pricing formula, they have removed the 500 lb. barrel price from Class III calculations, leaving only 40 lb. blocks as the sole reference price for cheese.
There have also been some changes in component assumptions. Protein and solids factors will increase. This is meant to align formulas more closely with today’s milk composition. These changes have been delayed until December 2025. This is to give risk management tools such as DRP insurance, contracting and hedging strategies some time to adjust or adapt before the new pricing structure roll out begins.
For the producers, the biggest impact seen so far is the immediate difference on their settlements, which have shown lower-than-expected returns under the updated system, especially if they are focused on components due to the new make allowances.
For the future, the shift in protein and solids should improve valuations. Producers shipping into fluid milk markets should stand to benefit from stronger Class I values and higher differentials. But today, it is clear changes in policies may help improve transparency and make calculations easier — but not always the best financially for the producers.
As far as where to go from here for the farmer, learn as much as you can about the new policy changes, how it affects your farm prices and talk with your marketing professionals about what needs to be done for hedging or insurance needs going forward.
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