After a long winter, farmers have returned to the fields for a new crop year, and milk production is racing higher to the peak output weeks of the year. Milk prices were relatively healthy in the first quarter of this year, and when coupled with welcomed lower feed costs, there were likely profits earned on dairies in most regions of the country. However, recent policy shifts have clouded the outlook for the months ahead, introducing demand uncertainty at a time when milk production and components are increasing. These wildcard factors are driving increased volatility and have forced markets lower in recent weeks, must the concern of farmers who were hoping for continued healthy margins throughout this year.
Increasing Milk Production and Supply Dynamics
On the supply side, milk production returned to growth this year, with volume up 0.5% in January followed by a leap-year adjusted 1% growth rate in February. Globally, production gains are expected as well, with RaboResearch expecting 0.8% YOY growth from the Big 7 export regions in 2025. Regardless of a limited supply of replacements, U.S. cow numbers grew quickly early this year, likely driven by farmers keeping cull rates low to drive as much milk volume as possible when prices were good. With this additional milk after three years of stagnation, the outlook shifts to demand expectations, with trouble brewing for the export markets.
Trade Policies and Their Ripple Effects
Since the U.S. presidential inauguration in January, a range of tariffs have been implemented, with some ongoing and others temporary. Initially, the focus was on China, Mexico, and Canada, key markets for U.S. dairy products. China has issued retaliatory tariffs on a wide variety of U.S. dairy products, making it more expensive for product to move to the country. So far, Mexico has avoided any retaliatory action, but the situation with both Canada and Mexico remains tenuous, with USMCA-covered products like dairy avoiding the worst of the tariff impacts for now. Attention now turns to the major announcement that came in early April: the U.S. will institute a 10% import tariff on goods from all countries, with certain higher tariffs on goods from more than 60 countries. The likelihood of retaliation is high, which could limit dairy exports moving forward. With more products to be consume domestically, markets have reacted accordingly lower.
It is frustratingly impossible to estimate how the trade situation will play out. CME Class III milk futures have sunk below $17 per hundredweight for May and June contracts, reflecting the uncertainty on the trade front. What was initially expected to be a healthy year for on-farm profitability is now being questioned after the increasing trade ambiguity. Thankfully, milk production growth is not overwhelming, and certainly, the tariff situation is ever evolving and could change quickly. Expect ongoing volatility in the short run, with market attention focused on forthcoming policy changes in the coming weeks.
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