Dairy’s paradox: Production climbs while prices fall – yet margins stay healthy. What’s driving this contradiction, and can it last?
EXECUTIVE SUMMARY: The U.S. dairy market in early 2025 faces growing price pressure as milk production rises amid economic uncertainty, with February output up 1% year-over-year despite already-expanded herds. Despite falling farmgate prices (all-milk price down $0.50/cwt to $23.60/cwt), margins remain relatively healthy thanks to moderating feed costs, maintaining the DMC margin at $13.12/cwt – well above triggering levels. Two significant developments offer potential bright spots: the advancing Whole Milk for Healthy Kids Act could boost fluid consumption in schools, while the FDA’s approval of Bovaer methane reducer presents environmental and economic opportunities for producers. With USDA forecasts projecting continued production growth but lower milk prices in 2025, successful operations will focus on margin management rather than chasing record prices.
KEY TAKEAWAYS
- Supply outpacing demand: The national milk cow herd has expanded significantly (+66,000 head YoY in January), driving production higher while economic uncertainty constrains consumption growth
- Component value trumps volume: While fluid production shows modest growth (1%), components like butterfat and protein are increasing more rapidly, reflecting the market’s shifting value proposition
- Policy shifts create opportunities: The Whole Milk for Healthy Kids Act advancing through Congress (24-10 committee vote) could provide significant demand stimulus for fluid milk in schools after a decade-long absence
- Margins, not prices, are key: Despite falling prices, the DMC margin remains healthy at $13.12/cwt, highlighting the importance of cost management over revenue maximization
- Regional variation growing: Geographic differences in production conditions are creating dramatically different operating environments across states, requiring region-specific strategies
Rising milk production, economic uncertainty, and expanding dairy herds put downward pressure on milk prices across the U.S. dairy industry. Farmers are watching their milk checks shrink even as their margins remain relatively comfortable – creating a complex market picture heading into summer 2025.
Let’s face it – the numbers don’t lie. February milk production jumped 1% year-over-year when adjusted for leap year, with the national dairy herd now 66,000 head larger than January 2024. This production surge has pushed the U.S. average all-milk price down $0.50/cwt to $23.60/cwt in February.
Are we producing our way into trouble again? It’s starting to look that way, as improving genetics and expanding herds drive production higher even as the industry navigates ongoing challenges like those HPAI outbreaks in California.
DAIRY PRODUCTS TAKING A PRICE HIT
All four NDPSR commodity prices took a nosedive in March, dragging Federal Order class prices down for the second month.
Class III milk fell to $18.62/cwt from $20.18 in February, while Class IV dropped to $18.21/cwt from $19.90. What are the products behind these declines? Butter ($2.339/lb), cheddar cheese ($1.822/lb), nonfat dry milk ($1.218/lb), and dry whey ($0.553/lb) all saw significant drops.
“These new processing facilities boost regional demand for raw milk but simultaneously add substantial volumes of whey and surplus cream to the market,” says dairy market analyst Mary Ledman. “This flood of byproducts is hammering prices across the board.”
MARGINS STAYING SOLID DESPITE PRICE DROPS
Here’s the silver lining – despite falling milk prices, the Dairy Margin Coverage (DMC) margin remains relatively healthy at $13.12/cwt in February. That’s down $0.73/cwt from January but still comfortably above the $9.50/cwt trigger level for government payments.
The DMC feed cost calculation showed corn prices climbing to $4.58 per bushel in February (up from $4.29), while soybean meal prices fell to $305 per ton (down from $317). Premium alfalfa hay held steady at around $243 per ton.
But don’t be fooled by the DMC calculations – they don’t tell the whole story. DMC only factors in major feed components against the all-milk price. What about labor costs? Fuel? Utilities? Repairs? These can eat up half or more of your production costs, and they’re not getting any cheaper.
EXPORT MARKET THROWING MIXED SIGNALS
U.S. dairy exports continue to play a crucial balancing role, absorbing roughly 16-18% of our milk solids production. The percentage of U.S. milk solids exported rose from 14.6% in January to 15.9% in February.
Some export categories are crushing it. Butter exports jumped 74%, anhydrous milk fat/butteroil skyrocketed an astonishing 448%, and all cheese varieties combined rose 16% during December 2024-February 2025 compared to a year earlier.
But here’s where things get dicey – other key export categories are struggling badly. Dry skim milk exports plummeted 24%, and whey products declined. The overall percentage of U.S. milk solids exported dropped by 3% year-over-year during December-February. Can we lose ground in these international markets when production is climbing?
CONGRESS SET TO BRING WHOLE MILK BACK TO SCHOOLS
Finally, some good news on the fluid milk front! The Whole Milk for Healthy Kids Act of 2025 is gaining serious momentum in Washington. This bill would allow schools to once again offer whole (3.25%) and reduced fat (2%) milk in cafeterias, potentially boosting consumption significantly.
“Federal policy, based on flawed, outdated science, has kept whole milk out of school cafeterias for more than a decade,” says Rep. Glenn “GT” Thompson (R-Pennsylvania), who introduced the bill alongside Rep. Kim Schrier (D-Washington).
The legislation passed the House Committee on Education and the Workforce in February by a vote of 24-10. Schools accounting for roughly 8% of U.S. fluid milk purchases could be a game-changer for the fluid category, which has been in freefall for years. Isn’t it time we put real milk back in kids’ hands?
REVOLUTIONARY METHANE REDUCER GETS FDA GREEN LIGHT
In a massive win for dairy sustainability, the FDA has approved Bovaer, a feed additive that slashes enteric methane emissions from dairy cattle. Developed by DSM-Firmenich and distributed by Elanco Animal Health, Bovaer hits the U.S. market in Q3 2025.
Just a quarter teaspoon per cow per day (60 parts per million) reduces methane emissions by 30% in dairy cattle without hurting milk production or components. That’s a potential reduction of 1 ton of CO2 equivalent per cow annually!
“This isn’t just an agricultural product; it’s pivotal in our conversation about the environmental future,” explains Dr. Ermias Kebreab, a leading researcher. The carbon credit potential could generate returns of $20+ per cow annually. How often do you get to save the planet AND improve your bottom line at the same time?
REGIONAL SHIFTS REDRAWING THE DAIRY MAP
The dairy industry’s geographic footprint keeps evolving, with stark regional differences emerging in production trends. The Western powerhouses aren’t having it all their way anymore.
California, traditionally America’s dairy king, faces serious challenges from HPAI outbreaks and sky-high labor, feed, water, and environmental compliance costs. These headwinds have knocked California’s production growth off track.
Meanwhile, Texas, South Dakota, Kansas, and Colorado are booming, often thanks to massive new processing investments. The Upper Midwest and Northeast are showing remarkable resilience, too, with faster milk yield growth per cow potentially closing the efficiency gap with western operations. Who would’ve thought we’d see this regional rebalancing just a few years ago?
FEDERAL ORDER REFORMS SET TO SHAKE UP PRICING
Buckle up for some significant changes! The Federal Milk Marketing Order (FMMO) reforms kick in on June 1, 2025, and they’ll substantially reshape regional economics. Changes to Class I differentials, manufacturing make allowances, and other pricing factors will completely rewrite the minimum prices paid for milk across different uses and locations.
These adjustments will boost most Class I differentials nationwide, with the impact varying by county. For example, differentials in Ohio will jump by $1.10 to $2.30/cwt, depending on where you’re located.
The reforms, including the return to the “higher-of” Class I mover formula and increased make allowances, will likely favor areas with higher fluid milk utilization over regions dominated by manufacturing. Are your farm’s finances ready for these changes?
ECONOMIC UNCERTAINTY CLOUDING THE CRYSTAL BALL
The broader economic picture isn’t exactly crystal clear. While inflation is cooling, consumers remain cautious with their spending habits.
The Consumer Price Index (CPI) for all items set a record in March 2025 but was just 2.4% higher than a year earlier, showing relatively modest inflation. But here’s the rub – there’s a huge disconnect between farm-level prices and what consumers pay at retail.
While farm prices have been falling, retail prices are still climbing! Fluid whole milk rose to $4.050 per gallon in March (up from $4.026 in February), and cheddar cheese jumped to $5.737 per pound (up from $5.536). This price transmission lag means consumers aren’t yet benefiting from lower farm prices. And if consumers can’t catch a break at the grocery store, how can we expect dairy demand to stay strong?
WHAT’S AHEAD FOR THE REST OF 2025?
The USDA’s April World Agricultural Supply and Demand Estimates (WASDE) report revised the 2025 annual milk production forecast upward by 700 million pounds to 226.9 billion pounds. At the same time, they lowered their price forecasts, projecting an average all-milk price of $21.10/cwt for 2025 – down $0.50/cwt from earlier expectations.
Success in 2025 won’t come from chasing record milk prices. You must focus on cost control, operational efficiency, and smart risk management. Keep your eyes on economic conditions, trade policies, disease outbreaks, and weather impacts – any of these could throw a wrench.
For dairy producers navigating these tricky waters, several strategies can help maintain profitability and resilience. These include aggressive cost management, focusing on component production rather than just volume, using risk management tools, tracking regional processing opportunities, and building financial reserves to weather market volatility.
THE BOTTOM LINE
The U.S. dairy market 2025 presents a mixed bag of opportunities and challenges. Production continues to grow despite economic headwinds, creating price pressure partially offset by lower feed costs.
The potential return of whole milk to schools and introducing Bovaer for methane reduction offer exciting possibilities for fluid milk demand and sustainability efforts. Meanwhile, upcoming FMMO reforms will reshape the economic landscape starting in June.
Let’s face it – success in 2025 won’t come from record milk prices. It’ll come from managing margins through strategic cost control, component optimization, and smart risk management. Isn’t it time to focus on what you can control rather than what you can’t?
Learn more:
- USDA Slashes 2025 Milk Price Forecast By $1: What Dairy Farmers Need to Know
- U.S. Dairy Markets Report February 21, 2025: Production Gains, Trade Tensions, and HPAI Challenges
- Global Dairy Market in 2025: Production Shifts, Demand Fluctuations, and Trade Dynamics
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