Cheese crash exposes fatal flaw in dairy risk management—$12/cwt margins despite “cheap” feed prove milk price hedging trumps input cost focus
EXECUTIVE SUMMARY: The dairy industry’s obsession with feed cost management is dangerously misguided when Class III futures crater 28 cents while corn sits comfortably below $4.50/bushel. This comprehensive CME market analysis reveals how 25 block cheese trades with zero bids created a $1.27 weekly Class III collapse, pushing income-over-feed costs below $12/cwt despite historically favorable grain prices. The brutal math exposes a 20% margin compression driven entirely by milk price destruction, not input inflation—contradicting decades of conventional wisdom that positions feed cost hedging as the primary risk management tool. Global demand destruction is overriding domestic supply fundamentals, with Mexican buyers becoming “price-selective” on $2.47 billion in annual purchases while U.S. component-adjusted production surges 3.0% year-over-year. FMMO reforms effective June 1st are creating structural pricing advantages for butterfat producers, with Class IV projected to outperform Class III by $0.60/cwt in 2026. Progressive producers implementing Dairy Revenue Protection within 48 hours and optimizing for 4.50%+ butterfat levels will capture $0.75-$1.50/cwt premiums while competitors cling to outdated volume-focused strategies.
KEY TAKEAWAYS
- Immediate DRP Implementation Delivers Crisis Protection: With Class III below $17.00/cwt and further weakness projected, establishing Dairy Revenue Protection floors within 48 hours protects against $1.25-$1.75/cwt additional losses through August 2025—far exceeding potential feed cost savings
- Butterfat Optimization Captures Structural Premium: Target 4.50%+ butterfat levels to access $0.75-$1.50/cwt premiums as Class IV prices maintain $0.60/cwt advantage over Class III in 2026 projections, reversing traditional protein-focused strategies
- Component-Focused Production Trumps Volume Strategy: U.S. milk shows 3.0% component-adjusted growth versus 1.6% volume growth, yet cheese prices collapse—proving market values manufacturing solids over raw gallons, demanding strategic breeding and nutrition shifts
- Regional FMMO Advantages Create Geographic Arbitrage: June 1st reforms increased Northeast Class I differentials to $5.10/cwt while manufacturing regions face relative disadvantages—strategic location evaluation now delivers measurable pricing benefits
- Trading Pattern Analysis Reveals Market Paralysis: 25 block trades with zero bids versus 6 barrel bids with zero offers signals bifurcated cheese market requiring sophisticated risk management beyond traditional spot price monitoring
Class III milk futures plunged $0.28/cwt as cheese blocks collapsed 5.50¢ and barrels fell 4.25¢, extending a brutal week that’s pushing farm margins below break-even levels. With July Class III now at $16.98/cwt and income-over-feed costs projected to slip below $12/cwt through August, immediate risk management action is critical.
Today’s Price Action & Farm Impact
| Product | Closing Price | Daily Change | Weekly Trend | Direct Impact on Farmers |
| Cheese Blocks | $1.5950/lb | -5.50¢ | -10.0¢ (-5.8%) | Severe Class III pressure continues |
| Cheese Barrels | $1.6150/lb | -4.25¢ | -11.2¢ (-6.5%) | Amplifies protein value destruction |
| Class III (JUL) | $16.98/cwt | -$0.28 | -$1.27 (-7.0%) | Milk checks under severe pressure |
| Class IV (JUL) | $18.83/cwt | -$0.22 | -$0.44 (-2.3%) | Butterfat premium maintaining |
| Butter | $2.5350/lb | +1.00¢ | +0.56¢ (+0.2%) | Modest support for Class IV |
| NDM Grade A | $1.2500/lb | -1.00¢ | -1.88¢ (-1.5%) | Export demand softening |
| Dry Whey | $0.5725/lb | +0.25¢ | +1.81¢ (+3.3%) | Protein markets holding better |
Market Commentary: Today’s cheese rout extends what’s becoming a devastating June for Class III valuations. Block cheese has now shed over 15¢ in two weeks, with domestic buyers reportedly “gone dark” as they await further price declines. The 25 trades in blocks today show active selling pressure, while the complete absence of bids signals market participants are stepping aside until this correction finds a floor.
Enhanced Trading Activity Analysis
Detailed Market Depth Snapshot (June 24, 2025):
| Product | Trades | Bids | Offers | Bid-Ask Environment | Market Sentiment |
| Cheese Blocks | 25 | 0 | 2 | Sellers Only – No buying interest | Panic selling |
| Cheese Barrels | 5 | 6 | 0 | Buyers Only – No selling interest | Distressed demand |
| Butter | 0 | 2 | 2 | Balanced but inactive | Cautious neutrality |
| NDM Grade A | 1 | 0 | 1 | Minimal activity | Disinterest |
| Dry Whey | 2 | 3 | 2 | Modest interest both sides | Stable engagement |
Critical Market Signal: The stark contrast between blocks (25 trades, 0 bids) and barrels (5 trades, 6 bids, 0 offers) reveals a bifurcated cheese market. Block cheese is experiencing liquidation selling with no buying interest, while barrel cheese shows distressed demand with buyers present but no willing sellers. This unusual pattern suggests different end-user dynamics and potential processing disruptions affecting specific cheese formats.
Feed Cost & Margin Analysis
Current Feed Situation:
- Corn (DEC): $4.2875/bu (down 5.5¢) – Feed costs remaining favorable
- Soybean Meal (DEC): $295.00/ton (down $1.70) – Protein costs supportive
- Milk-to-Feed Ratio: Severely compressed despite favorable feed prices
The Brutal Math: Despite corn trading well below $4.50 and soybean meal under $300/ton, income-over-feed costs are projected to crash below $12/cwt from March through August 2025. This represents a devastating 20% margin compression for most operations, driven entirely by collapsing milk prices rather than input cost inflation.
Production & Supply Insights
Production Surge Continues: U.S. milk production reached 19.9 billion pounds in May 2025, up 1.6% year-over-year, marking the second consecutive month of significant gains. The U.S. dairy herd expanded to 9.45 million head, the highest since August 2021.
Component Quality Rising: Fat content reached 4.31% (up 1.7% year-over-year) while protein climbed to 3.34% (up 1.2% year-over-year). Farmers are producing the highest-quality milk in years, yet the market is punishing them with lower prices – a clear signal that demand destruction is overpowering supply-side quality improvements.
Market Fundamentals Driving Prices
Domestic Demand Crisis: Retail cheese buyers have “gone dark,” holding off purchases while waiting for further declines. Domestic cheese consumption dropped 56 million pounds in Q1 2025, while weak restaurant traffic continues dampening foodservice demand.
Global Context – Mixed International Signals: Mexico remains the largest U.S. dairy export market at $2.47 billion, but Mexican buyers are “becoming more selective on pricing”. Mexico’s dairy demand was previously expected to grow 2% year-over-year in 2024, reaching over 30.4 billion pounds, but this growth is now showing signs of price sensitivity that could impact U.S. exports.
Federal Milk Marketing Order Impact Analysis
FMMO Reforms Creating New Regional Dynamics: The June 1, 2025 FMMO changes are introducing significant regional price variations:
| FMMO Region | Previous Class I Differential | New Class I Differential | Impact on Regional Pricing |
| Northeast (Boston) | $4.10/cwt | $5.10/cwt | +$1.00/cwt premium increase |
| Cuyahoga County | $2.00/cwt | $3.80/cwt | +$1.80/cwt premium increase |
| Upper Midwest | Lower differentials | Moderate increases | Regional competitiveness shifts |
Key Regional Implications: The “higher-of” Class I pricing formula restoration and increased Class I differentials are creating new regional advantages for fluid milk producers. Areas with high Class I utilization will see improved pricing, while manufacturing-focused regions may face relative disadvantages as cheese markets collapse.
Forward-Looking Analysis
USDA Projections vs. Current Reality: USDA raised its 2025 milk production forecast to 227.3 billion pounds (up 0.4 billion pounds) with an all-milk price expectation of $21.60/cwt. However, with July Class III futures at $16.98/cwt, current market conditions suggest these projections may prove optimistic.
The 2026 Outlook: USDA projects milk production will grow further to 227.9 billion pounds in 2026, with the all-milk price averaging slightly lower at $21.15/cwt. Class IV prices are consistently projected to exceed Class III prices in 2026, reinforcing the butterfat premium strategy.
Regional Market Spotlight: Infrastructure Strain Intensifying
Southwest Expansion Creating Logistics Crisis: Texas milk production jumped 10.6% year-over-year, with the state adding 50,000 cows in 12 months. This rapid expansion is outpacing regional processing capacity, creating transportation bottlenecks while the trucking industry faces a record 80,000 driver shortage nationally.
Upper Midwest Processing Surge: New cheese facilities are adding 360 million pounds of annual capacity in the Upper Midwest. While positive long-term, this timing couldn’t be worse for current oversupply conditions, potentially intensifying the cheese market collapse.
Actionable Farmer Insights
Immediate Risk Management – Next 48 Hours Critical:
- Implement DRP Coverage NOW: With Class III below $17.00 and further weakness likely, establish Dairy Revenue Protection floors for Q3/Q4 production immediately
- Component Focus: Target butterfat levels of 4.50% or higher to capture $0.75-$1.50/cwt premiums as Class IV maintains relative strength
- Regional Strategy: Evaluate FMMO benefits – farms in high Class I utilization areas may see improved pricing from recent reforms
Cash Flow Planning:
- Prepare for milk checks $2.00-$3.00/cwt below budget through August
- Lock favorable feed prices through forward contracts while corn remains below $4.50/bu
- Establish credit lines before margins deteriorate further
Industry Intelligence
FMMO Reforms Adding Structural Changes: The June 1st Federal Milk Marketing Order changes represent the most comprehensive overhaul in over two decades. Key impacts include:
- Updated make allowances that will generally decrease component values
- Return to “higher of” Class I pricing providing support for fluid milk producers
- Class I differentials increased nationwide, with significant regional variations
Processing Investment vs. Market Reality: Over $8 billion in new processing investments are coming online, with significant cheese capacity additions. This creates a dangerous timing mismatch – new supply hitting markets just as demand falters.
The Bottom Line
Today’s cheese market collapse represents a fundamental demand destruction event occurring while production reaches new highs. The stark trading patterns – 25 block trades with zero bids versus 6 barrel bids with zero offers – signal a bifurcated market in crisis.
With domestic buyers on strike and export markets becoming price-selective, traditional outlets for excess U.S. milk production are failing simultaneously. The recent FMMO reforms provide some regional relief for Class I producers, but manufacturing-focused operations face an extended period of margin compression.
Immediate Action Required: Farmers have roughly 48 hours to establish DRP protection before further Class III deterioration locks in devastating Q3 margins. Focus on butterfat optimization and regional advantages from FMMO changes – this margin compression cycle will separate survivors from casualties.
The convergence of maximum supply, minimum demand, and structural market changes creates unprecedented challenges. Those who adapt quickly to component-focused production, aggressive risk management, and regional optimization strategies will emerge stronger.
Complete references and supporting documentation are available upon request by contacting the editorial team at editor@thebullvine.com.
Learn More:
- Protecting Your Dairy’s Bottom Line: Essential Risk Management Approaches for 2025 – Reveals practical strategies for layering DMC, DRP, and forward contracts to protect against the exact margin compression scenarios highlighted in today’s market analysis, with expert insights on timing and implementation.
- FMMO Reality Check: Why 2025’s $2.3 Billion Dairy Pricing Revolution Exposes the Fatal Flaw in American Milk Marketing – Demonstrates how to calculate your farm’s specific financial impact from June 1st FMMO changes and provides a strategic roadmap for capturing regional pricing advantages mentioned in today’s report.
- The Future of Dairy Farming: Embracing Automation, AI, and Sustainability in 2025 – Explores cutting-edge automation and AI solutions that can deliver the 60%+ labor cost reductions and component optimization strategies essential for surviving the current margin compression cycle.
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