Stop chasing milk volume. Component optimization delivers 5.3% butterfat growth while volume stagnates at 0.5%. Your margin depends on it.
EXECUTIVE SUMMARY: Forget everything you’ve been told about prioritizing milk volume – the June 17th cheese market collapse proves that smart producers who’ve pivoted to component optimization are capturing premiums while volume-focused operations face $1.50/cwt Class III losses. The data doesn’t lie: butterfat production is surging 5.3% annually while overall milk volume crawls at just 0.5%, with average butterfat levels hitting 4.40% and protein reaching 3.40% in 2025. Meanwhile, the complete absence of cheese barrel offers signals institutional liquidation patterns not seen since 2019, yet butter maintains relative strength with aggressive institutional buying. The new FMMO reforms effective June 1st are explicitly rewarding component-rich milk through updated skim milk composition factors, creating a structural advantage for farms optimizing genetics and nutrition programs. With feed costs offering unprecedented relief – corn at $4.31/bu and the milk-to-feed ratio holding strong at 2.43 – progressive producers have a 48-hour window to lock in margins while repositioning for the emerging “component economy.” Stop betting on yesterday’s volume game and start capitalizing on today’s component premiums before your competitors figure out what you already know.
KEY TAKEAWAYS
- Component Optimization ROI: Farms producing 4.40% butterfat milk capture 5.3% annual growth premiums while volume-focused operations stagnate at 0.5% growth, translating to measurable income advantages as FMMO reforms reward higher-value milk through updated composition factors.
- Strategic Risk Management Window: With Class III futures trading at dangerous premiums to spot fundamentals and cheese showing institutional liquidation patterns, producers have exactly 48 hours to enroll in Dairy Revenue Protection (DRP) and establish price floors before further $1.50/cwt erosion occurs.
- Feed Cost Arbitrage Opportunity: Current corn prices at $4.31/bu combined with a robust 2.43 milk-to-feed ratio create immediate margin expansion potential – lock in 6-month feed contracts below $4.60/bu while this golden procurement window remains open.
- Regional Competitive Advantage: Upper Midwest operations maintain 20% lower feed costs than California counterparts, while Northeast producers benefit from new $1.2 billion processing capacity investments and favorable FMMO “higher-of” Class I pricing reforms.
- H5N1 Supply Disruption Hedge: With 950 herds across 16 states affected and California production down 9.2% year-over-year, biosecurity-focused operations positioned in lower-risk regions can capitalize on localized supply tightening and premium opportunities.
Today’s CME dairy markets delivered a sobering reality check for producers, with cheese prices experiencing significant weakness that directly threatens July milk checks. The complete absence of barrel buyers at the session close signals fundamental demand destruction, while butter’s modest decline suggests that the market’s “component economy” favors butterfat over protein. With feed costs remaining favorable and the milk-to-feed ratio holding at 2.43, margins face pressure primarily from revenue erosion rather than input cost inflation.
Today’s Price Action & Farm Impact
| Product | Final Price | Daily Change | Weekly Trend | Trading Volume | Impact on Farmers |
| Cheddar Block | $1.7550/lb | -2.50¢ | -9.20¢ | 13 trades | Direct Class III pressure of $1.25-1.75/cwt |
| Cheddar Barrel | $1.7700/lb | -2.00¢ | -8.20¢ | 1 trade | Zero offers – extreme liquidity crisis |
| Butter | $2.5775/lb | -1.50¢ | +4.50¢ | 5 trades | Modest Class IV support, butterfat premiums intact |
| NDM Grade A | $1.2650/lb | -0.50¢ | Unchanged | 1 trade | Stable export foundation for Class IV |
| Dry Whey | $0.5525/lb | +0.50¢ | -1.40¢ | 0 trades | Minor Class III support amid weakness |
Market Commentary
The cheese market’s breakdown reflects more than temporary weakness – it signals institutional liquidation patterns not seen since the 2019 market collapse. Block cheese trading volume of 13 transactions represents the heaviest selling pressure in two weeks, while the complete absence of barrel offers despite significant price declines indicates either extreme seller capitulation or a profound lack of buyers at any price level.
This divergence between futures and cash markets is particularly concerning. June Class III futures closed at $18.69/cwt, maintaining a significant premium to spot fundamentals that typically resolve with futures declining to align with cash reality. July Class III futures showed modest strength at $18.14/cwt, but this disconnect suggests either delayed recognition of fundamental weakness or temporary liquidity constraints.
The market’s shift toward a “component economy” remains evident, with butterfat demonstrating relative resilience despite today’s decline. This trend, where butterfat comprises an increasing portion of milk income, reinforces the importance of component optimization for producers seeking to maintain margins in volatile markets.
Feed Cost & Margin Analysis
Current feed market conditions provide crucial relief amid dairy price pressure, with the milk-to-feed ratio maintaining strength at 2.43 – well above the critical 2.0 threshold that typically signals margin stress.
Current Feed Costs & Trends
- Corn (July): $4.3075/bu, down 3.5¢ from June 10th (-0.81%)
- Soybean Meal (July): $285.30/ton, up $1.50 from June 10th (+0.53%)
- Milk-to-Feed Ratio: 2.43 (favorable for producers)
- Daily Margin Over Feed Cost: $3.58 per cow (based on 70 lbs production)
The combination of lower corn prices and relatively stable protein costs creates a supportive environment for dairy margins, even as milk prices face headwinds. Feed costs have provided substantial relief compared to 2024 levels, with corn prices falling nearly 30% and offering strategic procurement opportunities.
Regional feed cost advantages persist, with Upper Midwest operations benefiting from proximity to corn and soybean production areas, maintaining feed bills 20% lower than regions like California. This geographical advantage becomes increasingly important as margin pressures intensify from revenue-side challenges.
Production & Supply Insights
U.S. milk production continues expanding despite price volatility, with USDA forecasting 227.3 billion pounds for 2025 – a significant upward revision from earlier projections. This growth stems from both herd expansion (projected 9.380 million head) and modest productivity gains, though milk-per-cow growth remains below historical averages at 0.3%.
Component Production Surge
The industry’s transformation toward higher-value components continues accelerating, with butterfat production surging 5.3% annually while overall milk volume growth remains modest at 0.5%. Average butterfat levels have risen to 4.40% and protein to 3.40% in 2025, reflecting both genetic progress and strategic feeding programs focused on component optimization.
H5N1 Impact Assessment
The H5N1 virus continues affecting dairy operations, with nearly 1,000 herds across 17 states reporting infections as of June 2025. California remains heavily impacted, with approximately 650 affected herds, contributing to the state’s recent 9.2% year-over-year production decline. Mathematical modeling suggests dairy outbreaks will continue throughout 2025, with Arizona and Wisconsin identified as the highest-risk states for future outbreaks.
The emergence of the D1.1 genotype in Nevada cattle represents a concerning development, indicating multiple independent spillover events from avian reservoirs. This genetic diversity complicates biosecurity efforts and suggests the virus continues evolving within cattle populations.
Market Fundamentals Driving Prices
Domestic Demand Dynamics
The U.S. dairy market exhibits a “two-speed” demand environment that directly impacts pricing. Retail dairy sales reached approximately $78 billion in 2024, representing $2 billion growth year-over-year, driven by consumer preferences for functional dairy products enriched with protein and probiotics.
However, foodservice demand remains problematic, with restaurant sales declining from $97.0 billion in December to $95.5 billion by February 2025 – a seven-month low. This foodservice weakness significantly affects overall demand, given that 51% of American food dollars are spent outside the home.
Export Performance & Global Competition
U.S. dairy exports show mixed signals, with total trade declining 5% in April despite strong performance in specific categories. Cheese exports achieved their second-highest month ever in March, while butter exports surged 171% year-over-year, capitalizing on favorable competitive pricing.
The Global Dairy Trade index reflects global price pressure, declining 1% in recent auctions with broad-based weakness across most categories. This international softness adds downward pressure to U.S. pricing, particularly for export-dependent products like NDM and whey.
Trade policy uncertainty persists as a significant risk factor, with retaliatory tariffs from key partners like China and Canada already impacting first-quarter export performance. The industry’s ability to offset domestic demand softness relies heavily on maintaining open access to international markets.
Forward-Looking Analysis
USDA Price Forecasts & Market Outlook
The USDA’s June 2025 WASDE report projects an all-milk price of $21.95/cwt for 2025, with a slight decline to $21.30/cwt anticipated in 2026. However, current Class III futures trading significantly below these projections suggests market skepticism about achieving official price targets.
Class III milk price forecasts have been revised multiple times, from initial projections of $17.95/cwt to current estimates ranging from $18.70-19.10/cwt for 2025. This volatility in official projections reflects the challenging fundamental environment facing the sector.
Key Risk Factors
Upside Potential:
- Continued strong export demand for butterfat and cheese products
- Weather-related supply disruptions (heat stress can reduce production by 8-12% when temperatures exceed 85°F)
- Increased domestic demand for functional dairy products
Downside Risks:
- Persistent soft foodservice demand dampening overall consumption
- Global supply expansion from major exporting regions in Q2-Q3 2025
- H5N1 spread, causing localized production disruptions
- Trade policy volatility disrupting export markets
Regional Market Spotlight: Upper Midwest Resilience
The Upper Midwest continues demonstrating competitive advantages that position the region favorably despite national market challenges. Wisconsin and Minnesota’s combined production of 42.7 billion pounds in 2024 slightly exceeded California’s 40.2 billion pounds, maintaining the region’s status as America’s dairy heartland.
Structural Advantages
The region benefits from consistent feed cost advantages, with proximity to corn and soybean production providing 20% lower feed bills compared to Western regions. This cost structure becomes increasingly valuable as margin pressures intensify from revenue-side challenges.
Federal Milk Marketing Order reforms implemented June 1st generally favor regions with higher Class I utilization, though the Upper Midwest will experience impacts from updated make allowances and Class I pricing mechanisms. The shift to “higher-of” Class I pricing may provide modest support, while increased make allowances create near-term pressure on component values.
Processing capacity expansion continues in the region, with new facilities providing additional milk outlets and potential premium opportunities for producers. This infrastructure investment signals long-term confidence in the region’s competitive position.
Actionable Farmer Insights
Immediate Risk Management Priorities
Current market conditions demand aggressive risk management action within the next 48 hours. Producers should prioritize Dairy Revenue Protection (DRP) enrollment for third and fourth-quarter production, establishing price floors before further deterioration occurs.
The recent FMMO reforms alter Class III and Class IV settlement price calculations, requiring updated hedging strategies. A prudent approach involves choosing the higher contract between Class III and Class IV to hedge the portion of milk represented by Class I prices, providing more reliable price floors.
Component Optimization Strategy
With butterfat demonstrating relative strength amid broader market weakness, optimizing for higher milk components becomes critical. Producers should immediately review genetics and nutrition programs to maximize butterfat premiums as the “component economy” continues rewarding higher-value milk.
The FMMO reforms’ updated skim milk composition factors (effective December 1st) will further reward component-rich milk, making this optimization essential for maintaining competitiveness.
Feed Cost Management
Take advantage of current corn prices below $4.31/bu by securing long-term contracts, ideally locking in costs below $4.60/bu. Soybean meal prices under $286/ton present strategic procurement opportunities before potential seasonal tightening occurs.
With above-normal temperatures expected across most of the Lower 48, implementing heat stress mitigation strategies becomes critical for maintaining production and components. Research indicates consecutive days above 85°F can reduce production by 8-12%, making cooling investments increasingly valuable.
Industry Intelligence
Federal Milk Marketing Order Implementation
The FMMO reforms implemented on June 1st represent the most significant policy changes since 2018, with additional modifications scheduled for December 1st. Key changes include the return to “higher-of” Class I pricing, updated make allowances reflecting current processing costs, and revised skim milk composition factors.
Initial impacts suggest increased Class I prices across most orders, particularly benefiting regions with high fluid milk consumption. However, higher make allowances create near-term pressure on component values, requiring strategic procurement and pricing strategy adjustments.
Technology & Innovation Trends
Industry executives report growing interest in AI applications for herd management and operational efficiency. “Face to Farm” transparency initiatives continue gaining importance as consumers demand greater supply chain visibility.
Precision fermentation technology offers potential for more efficient dairy product manufacturing, though widespread adoption remains years away. Dairy executives maintain optimism about volume growth, with 80% expecting increases exceeding 3% over the next three years.
Weekly & Monthly Context
Today’s market action continues the concerning trend that began with June 16th’s “cheese market collapse,” when blocks fell 5.75¢, and barrels declined 4.50¢ with zero trading activity. This two-day decline represents the most significant cheese weakness since the 2019 market correction.
The broader June trading pattern shows divergent performance across the dairy complex. Butter has demonstrated relative strength with modest gains earlier in the month, while cheese markets have faced persistent pressure from higher production and softer demand.
Weekly trading volumes remain below historical norms, suggesting institutional participants have stepped away from active trading pending clarity on fundamental direction. This liquidity reduction amplifies price volatility and complicates risk management decisions for producers.
Looking Ahead: The full impact of FMMO reforms will become clearer as July milk checks are calculated under new formulas. Additionally, seasonal heat stress patterns typically intensify through July-August, potentially providing supply-side support if widespread temperature extremes develop.
What’s your current hedging strategy, given today’s cheese weakness? Share your insights in our producer forum and learn from fellow farmers across the country.
Learn More:
- Protecting Your Dairy’s Bottom Line: Essential Risk Management Approaches for 2025 – Reveals practical strategies for implementing layered financial protections through DMC, DRP, and forward contracts, demonstrating how to build resilience against the market volatility highlighted in today’s cheese collapse.
- How Smart Operators Capture $27 Billion in Hidden Market Value While Food Prices Crash – Demonstrates how to capitalize on component optimization strategies that deliver $90,000-120,000 additional annual revenue for 500-cow operations, perfectly complementing today’s butterfat strength signals.
- Dairy’s Bold New Frontier: How Forward-Thinking Producers Are Redefining the Industry – Provides strategic insights into technology adoption delivering 5-10% milk yield increases and $0.75-1.00/cwt labor savings, essential for maintaining competitiveness amid current market pressures.
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