U.S. Dairy Supply Surge: USDA Forecasts Higher Production, Mixed Price Outlook Through 2026

USDA forecasts rising milk production and changing export patterns through 2026. What’s driving the $21.60 milk price, and why might it drop? Find out now.

EXECUTIVE SUMMARY: The latest USDA Supply and Demand report signals significant shifts ahead for dairy markets, with expanding U.S. milk production expected to continue through 2026 despite slightly lower projected prices. While strong export demand is currently offsetting supply growth and supporting a $21.60/cwt all-milk price for 2025, farmers should prepare for potential challenges as fat-basis exports decline and imports rise in 2026, pushing prices down to $21.15/cwt. The double impact of growing dairy herds and increasing per-cow productivity creates a compounding effect on total milk supply that will fundamentally shape market conditions over the next two years, requiring strategic planning and robust risk management from producers looking to maintain profitability.

KEY TAKEAWAYS

Window of opportunity: Strong prices projected for 2025 ($21.60/cwt) provide a chance to strengthen financial position before potentially softer markets arrive in 2026 ($21.15/cwt)
Export dependency increasing: Current price strength is heavily supported by international demand for butter, cheese, and whey products, making your operation more vulnerable to global market shifts
Domestic consumption growth: Increasing U.S. consumption for both fat and skim-solids components provide a stable foundation even as international markets fluctuate
Component value divergence: Different export patterns for fat versus protein products mean optimizing your herd for higher components could provide advantages as markets evolve
Risk management critical: With expanding U.S. production meeting evolving international markets, implementing forward contracts and other protection strategies now could safeguard your operation from the volatility ahead

USDA dairy forecast, milk production increase, dairy export demand, milk price outlook, dairy market analysis

According to the USDA’s latest Supply and Demand report released yesterday, U.S. dairy farmers can expect expanding milk production, export growth, and moderate price declines by 2026. The May 12th update confirms the trend of growing dairy herds and increasing per-cow productivity, setting the stage for significant market developments over the next two years.

The USDA projects the all-milk price for 2025 at $21.60 per hundredweight (cwt), with a slight dip to $21.15 per cwt in 2026 as increased supply weighs on markets despite growing domestic and export demand.

Production Expansion Continues

U.S. dairy herds are growing, and that’s not slowing down anytime soon. The May report confirms what many producers have observed firsthand – more cows are entering production, and each cow is giving more milk.

This double-whammy of larger herds and better productivity creates a compounding effect on total milk supply, shaping market dynamics through 2026.

For producers making expansion decisions, this trend signals the need for caution. While prices remain relatively strong in the near term, the growing national herd suggests increased competition is coming.

Export Markets Providing Short-Term Support

International demand is currently the dairy industry’s best friend. The USDA has raised its forecast for exports fatally, pointing specifically to “competitively priced butter and cheese” driving international sales.

Exports of whey products, lactose, and cheese are all projected to increase, providing crucial market support that’s helping offset the production increases.

This export strength explains why the USDA raised its price forecasts for butter, cheese, nonfat dry milk (NDM), and whey from last month’s projections – international buyers are absorbing much of the additional production.

Long-Term Price Pressures Building

Looking ahead to 2026, the picture becomes more complex. Fat-basis exports are expected to decline compared to 2025, potentially adding pressure to butter and cheese markets.

Meanwhile, imports are projected to rise, with more butter and skim solids entering the U.S. market. Reduced exports and increased imports could create more challenging market conditions.

The forecasted milk price drop from $21.60 to $21.15 per cwt between 2025 and 2026 reflects this building pressure, though strong domestic consumption should prevent more dramatic declines.

Domestic Consumption Provides Foundation

A key bright spot in the report is the projection for domestic dairy consumption, which is expected to increase for both fat and skim-solids in 2026.

This growth in home market demand creates a more stable foundation for the industry even as international markets fluctuate. American consumers continue embracing dairy products across multiple categories, providing a reliable customer base.

For farmers concerned about market volatility, this domestic growth represents perhaps the most sustainable pillar of long-term demand.

What This Means for Your Operation

If you’re making plans for your dairy operation, the USDA report suggests a window of opportunity now, with potential challenges ahead.

The current price strength for 2025 offers a chance to strengthen your financial position before the projected softer markets 2026 arrive. Smart producers will use this period to reduce debt, invest in efficiency improvements, or build cash reserves.

Component values will likely increase divergence as different export markets favor fat versus protein products. Farms that optimize production for higher components may find advantages in this environment.

Risk Management Becomes Critical

Price volatility is almost guaranteed with expanding U.S. production, growing but uneven export markets, and changing import patterns. Now is the time to evaluate your risk management strategy.

Forward contracting, futures markets, and government programs should all be on the table as you plan for the next 24 months. The relatively strong prices projected for 2025 provide an opportunity to lock in margins while they’re available.

Remember that the entire industry sees these same projections, which means many producers may be expanding simultaneously, accelerating the supply growth beyond the forecast.

The Bottom Line

The dairy landscape is shifting beneath our feet. Growing U.S. production will meet evolving international markets and steady domestic consumption, creating opportunities and challenges.

Near-term price strength masks the pressure of expanding supply, giving smart producers a window to prepare. Those who understand these market dynamics and position their operations accordingly will navigate the coming changes most successfully.

What’s your plan for capitalizing on stronger 2025 prices while preparing for potential softening in 2026? Share your thoughts in the comments or contact our market analysts for personalized guidance.

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