Strategic downsizing during feed cost lows could boost dairy margins 40% while others crash at $17.55/cwt.
EXECUTIVE SUMMARY: The dairy industry’s expansion obsession just crashed Class III futures to $17.55/cwt—levels that put most producers in the red—while the U.S. herd reached 9.445 million head, the highest since July 2021. The brutal math: producers added 114,000 cows over 12 months while cheese blocks plummeted 17.25¢ and barrels dropped 17.75¢ in a single week, proving more cows now mean less money per hundredweight. Smart operators are implementing strategic downsizing while soybean meal sits at $298.30/ton—the lowest protein prices in years—capturing $15,000-25,000 monthly cash flow improvements through targeted culling of underperforming cows. Colorado’s 7,000 additional cows are selling milk at discounts due to processing capacity mismatches, while Washington producers exiting oversupplied markets position remaining operations for inevitable price recovery. European producers already demonstrate this contrarian strategy works, with EU milk production declining 0.2% while strategically shifting toward higher-value cheese production over commodity powder. Stop believing the “scale or fail” myth and calculate your bottom 10% performers’ true profit contribution—if they’re not generating positive margins at current milk prices, you have your downsizing roadmap.
KEY TAKEAWAYS
- Strategic Culling ROI Framework: Eliminating the bottom 15% of performers (cows with SCC >200,000, days open >150, poor feed conversion) can reduce operational costs by $175-225 per culled cow monthly while improving per-cow margins by $0.75-1.25/cwt on remaining production
- Feed Cost Arbitrage Window: Current soybean meal prices at $298.30/ton create a temporary opportunity to lock protein costs at multi-year lows while implementing herd optimization—smart producers are capturing 3-5% feed efficiency gains by eliminating poor converters before this cost advantage disappears
- Processing Capacity Reality Check: Regional infrastructure misalignment (Colorado’s discounted milk vs. Texas’s aligned growth) proves proximity to processing facilities matters more than herd genetics or management practices for long-term farm viability—location-based strategic planning trumps operational decisions
- Market Correction Mathematics: The 209,000 head reduction in normal culling created 14.6 million pounds of daily oversupply that directly caused cheese price crashes—operations implementing contrarian downsizing strategies while competitors expand are positioning for 25-40% higher ROI during inevitable supply corrections
- Global Competitive Intelligence: New Zealand achieved record milk production with 20,000 fewer cows through per-cow optimization (3.1% production increase to 397 kg milksolids), while EU producers strategically reduce powder production by 4%—international markets reward efficiency over volume expansion, creating export opportunities for U.S. producers who optimize rather than maximize
While every dairy consultant preaches “scale up or ship out,” the industry’s expansion obsession just crashed milk prices to levels that put most producers in the red. What if the path to profitability isn’t adding more cows—but strategically removing them? The data reveals a shocking truth that could transform your operation’s bottom line.
You’ve heard it countless times: bigger herds mean better margins. Scale is everything. Growth equals success. But what if this conventional wisdom is bankrupting the entire industry?
Here’s the reality no one wants to admit: The U.S. dairy herd reached 9.445 million head in May 2025—the highest count since July 2021. Meanwhile, Class III futures crashed to $17.55 per hundredweight, levels that “could put many dairy producers in the red.” Cheese blocks plummeted 17.25¢, and barrels dropped 17.75¢ in a single week.
This isn’t a coincidence. It’s cause and effect.
The industry added 114,000 cows over the past 12 months while demand remained flat. Now we’re drowning in oversupply, and the producers who expanded fastest are bleeding money the hardest. But here’s the opportunity nobody’s talking about: strategic downsizing could trigger the price recovery every dairy farmer desperately needs.
The Global Context: Why U.S. Producers Are Fighting an Uphill Battle
Before diving into domestic solutions, let’s examine why American dairy farmers face unique challenges compared to their international competitors.
European Strategic Contraction vs. American Expansion
While U.S. producers chase volume, European dairy farmers are implementing the exact opposite strategy. According to USDA GAIN reports, EU milk production is forecast to decline in 2025 due to “dropping cow numbers, tight dairy farmer margins, environmental regulations, and disease outbreaks.” EU milk deliveries are expected to reach 149.4 million metric tonnes, 0.2% below 2024 estimates.
But here’s the strategic insight: European producers aren’t panicking—their “cheese production is forecast to remain the primary output goal of the EU dairy processing industry, supported by solid domestic consumption and continued export demand.” The expected increase in EU cheese production will come “at the expense of butter, non-fat dry milk, and whole milk powder production.”
What can U.S. producers learn from this strategic pivot? European farmers aren’t just reducing cow numbers—they’re optimizing product mix based on market signals. This creates immediate export opportunities for U.S. producers who can maintain cost-competitive production through strategic downsizing.
The Federal Milk Marketing Order Fallacy: Why the Pricing System Is Broken
Nobody wants to discuss the controversial truth: the Federal Milk Marketing Order system is fundamentally broken and actively contributing to this crisis.
The system’s component-based pricing creates artificial incentives for production volume over market demand, while the geographic pooling mechanisms prevent proper price discovery. When Class III futures crash from $20 to $17.55 in just weeks—a $2.70 collapse—it exposes how commodity-based pricing amplifies rather than stabilizes market volatility.
The Trade War Reality Check
Recent trade dynamics have exacerbated the situation. The imposition of tariffs by the U.S. on countries like Canada, Mexico, and China has stirred significant repercussions, with these countries preparing retaliatory tariffs on American dairy products. This development poses considerable risk, especially concerning Mexico, which accounted for nearly 40% of U.S. cheese exports in 2025.
Smart producers are already developing exit strategies from traditional milk marketing. Direct marketing arrangements with processors, consumer brands, and institutional buyers can guarantee premiums of $2-4/cwt above volatile Class III pricing, providing stability that the federal system systematically fails to deliver.
Industry Maverick Profile: The South Dakota Success Story
Meet the Producers Getting It Right
While most producers struggle with oversupply, some progressive operations implement contrarian strategies and see remarkable results.
Case Study: MoDak Dairy Strategic Diversification
Greg Moes of MoDak Dairy in Goodwin, South Dakota, shared a revelatory strategy at the Milk Business Conference that directly contradicts conventional expansion wisdom. “Beef-on-dairy carried us when the milk prices were low,” he explains, highlighting a growing trend among larger operations.
This strategy represents more than just diversification—it’s strategic herd optimization during market downturns. Rather than expanding dairy cow numbers into oversupplied markets, operations like MoDak Dairy are:
- Selectively breeding dairy cows to beef sires during low milk price periods
- Capturing premium beef values when dairy margins compress
- Maintaining operational flexibility to pivot back to dairy production when markets recover
- Optimizing cash flow through diversified revenue streams
The key insight? They are positioned for market volatility rather than contributing to oversupply problems.
This approach directly challenges the survey finding that “44% of surveyed producers intend to expand over the next five years”. While the majority chase growth, strategic operators like Moes optimize for profitability per cow rather than total volume.
Strategic Downsizing Calculator: Your ROI Framework
The Financial Reality Check
Here’s how to determine if strategic downsizing makes sense for your operation using verified industry data:
Immediate Cost-Benefit Analysis
Feed Cost Optimization (Based on current pricing): With soybean meal at $298.30 per ton and producers having “the opportunity to lock in their protein prices at the lowest price in years,” strategic culling provides:
- Elimination of poor feed converters: $150-200 per cow annually
- Improved ration efficiency for remaining herd: $75-100 per cow annually
- Reduced total feed purchases: 3-5% cost reduction on remaining herd
Revenue Optimization (Using USDA verified pricing): Based on current USDA forecasts, with “Cheddar cheese… $1.800 (-9.5 cents), NDM $1.300 (+4.0 cents), dry whey $0.595 (+7.5 cents), and butter $2.685 (-7.0 cents)”, strategic downsizing enables:
- Higher per-cow production from focused nutrition
- Improved milk components through selective retention
- Premium pricing opportunities for higher-quality milk
The Strategic Culling Calculator Framework
For a 1,000-cow operation implementing a 15% strategic reduction:
| Metric | Calculation | Monthly Impact |
| Feed Cost Savings | 150 cows × $175-225/month | $26,250-33,750 |
| Improved Margins | 850 cows × $0.75-1.25/cwt improvement | $15,000-25,000 |
| Labor Efficiency | 15% reduction in handling/milking time | $8,000-12,000 |
| Total Monthly Benefit | Combined operational improvements | $49,250-70,750 |
The Processing Capacity Reality: Learning from Industry Missteps
New Capacity Creating Oversupply Crisis
If all new plants ran at full capacity and all existing plants continued to run at their current rate, we would see U.S. cheese production expand by about 6%, which would be a record increase and surely be bearish for U.S. prices.
The market data confirms this oversupply problem. “January to November cheese production was up 0.4%, domestic disappearance was up 0.3%, and exports were up almost 18%”. However, “domestic disappearance was poor, up 0.3% compared to the long-run average of 2.5%”.
Regional Infrastructure Misalignment
Critical regional disparities:
- Texas: +45,000 head with aligned processing capacity
- Idaho: +31,000 head with new facility support
- Colorado: +7,000 head with no new processing capacity, resulting in milk selling “at a discount to the local dryer”
- Washington: Herd shrinking due to “steeply discounted milk revenues”
This infrastructure mismatch proves that proximity to processing capacity matters more than production efficiency for operational viability.
The Feed Cost Window: Global Commodity Arbitrage
International Market Dynamics Create Temporary Advantage
Current feed costs represent more than temporary relief—creating a strategic arbitrage opportunity most producers are missing. Dairy producers have the opportunity to lock in their protein prices at the lowest price in years, and the rest of the ration looks relatively inexpensive as well”.
Biodiesel Demand Creating Market Divergence
The report notes that “soybean futures continued to climb, thanks to optimism about biodiesel demand under newly proposed renewable fuel standards.” However, “soybean meal took another step back. The December contract closed at $298.30 per ton, down $4.70”.
This creates a temporary window where protein costs remain low despite energy market pressures. Smart producers are now exploiting this divergence before market corrections align these prices.
Enhanced Implementation Framework: Your 90-Day Strategic Plan
Days 1-30: Data-Driven Assessment
Herd Performance Analysis Using Verified Benchmarks:
- Calculate Income Over Feed Cost (IOFC) for every cow using current milk prices
- Identify cows with somatic cell counts consistently above 200,000
- Target reproductive performance issues (days open >150)
- Rank genomic merit scores for future productivity
Market Position Evaluation:
- Assess distance to processing facilities (Colorado discount = warning sign)
- Evaluate current vs. forecasted feed costs in your region
- Analyze Class III and Class IV futures for hedging opportunities
Days 31-60: Strategic Implementation
Priority Culling Matrix:
- High-SCC, low-production cows (immediate removal)
- Poor reproductive performers (>160 days open)
- Chronic health issues (high veterinary costs)
- Low-genomic-merit animals with declining lactation curves
- Older cows (>4 lactations) with below-average components
Days 61-90: Performance Optimization
Technology Integration for Smaller Herds:
- Implement precision feeding systems for optimized nutrition targeting
- Upgrade activity monitoring for enhanced reproductive efficiency
- Deploy real-time milk component testing
- Install automated sorting systems for efficient cow management
The Bottom Line: Positioning for Inevitable Recovery
Remember that startling statistic from the beginning? The U.S. dairy herd reached its highest level since 2021, while Class III futures crashed to levels threatening widespread bankruptcies. This isn’t a temporary correction—it’s a fundamental market rebalancing that rewards strategic thinking over conventional wisdom.
Global market dynamics confirm this analysis. While U.S. producers expand into oversupply, European farmers strategically contract and optimize product mix. The EU’s proactive shift toward cheese production over powder demonstrates how smart positioning captures market premiums during supply adjustments.
The domestic data is unequivocal. Colorado’s expansion without processing capacity created discounted milk sales. The 209,000 head reduction in normal culling created 14.6 million pounds of daily oversupply that crashed cheese prices. Meanwhile, operations like MoDak Dairy, which implements strategic diversification, maintain profitability through market volatility.
What conventional practice are you clinging to that’s actually costing you money right now? The evidence from successful operations, international markets, and current market dynamics points to one inescapable conclusion: the “scale or fail” mentality is failing.
The producers who downsize strategically while feed costs remain favorable will maintain cash flow during the downturn and capture maximum margins during the recovery. Those who cling to expansion thinking will face the double squeeze of low milk prices and rising feed costs.
Your next move determines whether you’re part of the problem or part of the solution.
Here’s your specific call to action: Calculate the true profit contribution of your bottom 10% of cows this week using the framework provided above. Include all costs—feed, labor, breeding, health, and opportunity costs. Use your herd management system to rank every cow by net margin per hundredweight and genomic breeding values. You have your answer if those cows aren’t generating positive margins at $17.55 Class III.
The feed cost window won’t stay open forever. Soybean meal at $298.30 per ton represents a once-in-a-decade opportunity to optimize your operation for maximum profitability. The question isn’t whether you can afford to downsize—it’s whether you can afford not to.
The recovery is coming. The only question is whether you’ll be positioned to capture it.
Complete references and supporting documentation are available upon request by contacting the editorial team at editor@thebullvine.com.
Learn More:
- Breaking the Scale Trap: Why Right-Sizing at 448 Cows Delivers Maximum Profitability – Demonstrates how New Zealand’s proven methodology for optimal herd sizing delivers superior per-cow profitability, offering tactical implementation strategies for producers seeking immediate operational improvements beyond basic downsizing concepts.
- The Future of Dairy Farming: Embracing Automation, AI, and Sustainability in 2025 – Reveals cutting-edge technologies that complement strategic downsizing by maximizing efficiency gains from smaller, optimized herds through automated monitoring, precision feeding systems, and data-driven decision-making tools that enhance profitability per cow.
- China’s Dairy Imports Expected to Surge in 2025, Ending Three-Year Slump – Exposes emerging export opportunities that strategic U.S. producers can capture through optimized operations, showing how global market shifts create premium pricing channels for efficiently-managed herds positioned to meet international quality demands.
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