For U.S. dairy producers, the second half of 2026 is shaping up to be a classic story of supply and demand: Historically strong on-farm margins are driving an explosion in milk production, which in turn is poised to drag commodity prices down through the rest of the year.
That was the bearish warning delivered by Betty Berning, contributing dairy economist at HighGround Dairy, during her market forecast at the 2026 HighGround Dairy Conference in Chicago.
“Farmers are going to make more milk,” Berning says. “If you knew that you could be profitable in your business for the next year and a half, you would make more of whatever it is you make, and that’s how farmers respond too.”
Here is a breakdown of what producers can expect in the commodity markets and their milk checks through the second half of 2026 and into 2027.
The Beef Margin Driver
To understand the surge in milk production, one must first look at beef. According to Berning, robust beef-on-dairy calf prices and high cull cow values have artificially inflated dairy profitability.
“Beef income is greater than these margins,” Berning explains, showing a slide forecasting profitability through December 2027. “If I was a dairy farmer and I didn’t have the beef income, I would not have a margin right now.”
Because the value of crossbred beef calves is so high, the traditional culling calculus on farms has changed. Cows that are lower milk producers — which historically would have been culled — are being retained simply to birth a valuable beef calf. As a result, the U.S. dairy herd has swelled to its highest level since 1992.
Because of this expanded herd, HighGround Dairy has aggressively revised its U.S. milk production forecast upward, now predicting a 2% increase in total milk production for 2026.
Cheese and Butter: Prepare for Bearishness
More milk inevitably means more cheese and butter, and Berning expects this incoming wave of product to place significant downward pressure on prices over the next 12 months.
On the cheese side, the U.S. must maintain a price advantage over Europe and New Zealand to keep exports moving and prevent massive domestic stockpiles. Unfortunately, European cheese prices are also falling, and domestic U.S. food service demand has been sluggish. As a result, HighGround forecasts cheese to average $1.70 per pound in the second half of the year, bringing the 2026 annual average to $1.61 — the lowest average price since 2018.
“For cheese and butter, especially, the team at HighGround is bearish for the next 12 months, and we expect a return to more historical prices in the second half of 2027,” Berning says. “There is liquidity in the market, so hedge now.”
The butter market is similarly saturated. Despite decent domestic consumption and solid exports, the sheer volume of U.S. butterfat production has overwhelmed the market. Berning notes the market seems entirely unconcerned with holding low butter stocks because production is so incredibly high.
“Imagine you have a cupboard at your house, you know that whatever you want to fill that cupboard is at the grocery store, and you go every single week and get it,” Berning illustrates. “That’s kind of the butter market right now. So, even though the cupboard is empty, every week I can go get it if I need it. There’s not a lot of risk priced into this market.”
HighGround forecasts butter to average $1.85 in the second half of 2026, pulling back to a more typical $1.95 in 2027.
Powders: The Protein Boom Cools
The first half of 2026 saw massive, record-breaking prices for nonfat dry milk (NFDM), peaking at $2.29 per pound. However, this was driven not by traditional powder demand, but by processors pulling skim solids away to chase the lucrative, high-protein yogurt, cottage cheese and ultra-filtered milk markets.
Processors have since caught up. Between March and April, the U.S. saw a nearly 25 million lb. build in NFDM inventories — one of the largest month-over-month increases in 15 years. With supplies now outpacing demand, powder prices are falling rapidly.
“Tight supplies that have plagued markets are coming to an end, and demand for nearby product is available,” Berning says, noting the CME spot market is currently seeing aggressive offers with very few buyers. HighGround expects NFDM to average $1.55 in the second half of 2026, dropping to $1.50 in 2027.
Class III and Class IV Forecasts
Ultimately, the combination of suppressed cheese prices and falling powder prices will drag down producer milk checks.
HighGround forecasts Class III milk to finish 2026 with an annual average of $16.87 per hundredweight, inching up to $17.86 in 2027.
Class IV milk, which rode the massive wave of high powder prices earlier in the year, will pull back significantly in the second half of 2026 to $18.65, resulting in an annual average of $18.70. For 2027, Class IV is expected to remain relatively flat, averaging $18.85.
The bottom line for producers? Beef sales are providing a critical financial safety net, but the resulting surge in milk production will make dairy markets tough through the end of the year.
