Milk production is strong in the U.S. — up more than 4% versus the prior year in some recent months. While partially supported by easy to overcome prior year comparable datapoints, when output was negatively impacted by the avian influenza outbreak, the volume growth is the strongest noted since 2021 and follows three years of relatively flat production noted in 2022-2024. In addition to growing volume, components continue to increase as well, with butterfat and protein levels climbing steadily in recent years, allowing processors to make even more dairy products from their milk intake. This abundant supply — seen in nearly all regions of the country — has weighed on prices in recent weeks, with lower milk checks expected for dairy farmers expected to hit mailboxes in Q4.
Globally, the picture is similar — with nearly every key producing region seeing production expand as well. After a slow start to the year, the EU is seeing additional milk in recent months. High milk prices in New Zealand are supporting what could be a record-breaking milk production season, with all eyes on October volume — the typical yearly peak in the country. It is rare for all key global dairy areas to see volume expand simultaneously, but profitable milk prices and the lack of any negative weather event currently continues to support output around the globe.
With higher supply and mixed demand signals, the milk price outlook has declined in recent weeks. Most products have seen weakness, but cheese and butter especially have noted the steepest declines. Following three years of strength, the CME spot butter price has dropped below $2 per pound and is at the lowest level since 2021 into mid-October. Heavy cheddar volume has prevented any strength from materializing in the cheese market as well, and weak nonfat dry milk demand has negatively impacted that market even as supply is not abundant. Bucking the trend, and particularly helpful for the Class III outlook, solid protein demand has pushed the dry whey price slightly higher in recent weeks. Overall, milk prices have inched lower and are — in some cases — weaker than the cost of production, hurting the margin outlook for Q4 and into 2026.
Thankfully, other supportive factors are somewhat offsetting this lower expected milk revenue. Feed costs are expected to remain at multi-year lows, thanks to a solid harvest and trouble on the export front. Importantly, cow and calf sales continue to fetch record value, with dairy farmers keeping cows in the herd for longer to capitalize on impressive values fetched from beef on dairy cross calves. It might take several months for the world to work through this abundant milk supply, preventing milk prices from climbing in the near term. But a declining cost of production — coupled with non-milk revenue generation from calves — should be helpful for the bottom line in the meantime.
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