CME dairy markets surge across all products despite low volume-revealing a stark disconnect between spot market strength and bearish USDA forecasts.

EXECUTIVE SUMMARY: The May 2nd CME dairy markets displayed broad strength with all major products posting gains, led by butter (+2.00¢) and cheese barrels (+2.00¢), despite relatively low trading volumes. This spot market rally directly contradicts the USDA’s recently downgraded price forecasts for 2025, creating a significant disconnect between immediate market conditions and longer-term expectations. Current price strength appears driven by tight inventories (particularly for cheese), aggressive bidding meeting limited selling interest, and demand pull from new processing capacity. However, this optimism is tempered by fundamental headwinds including projected increased milk production (+0.7 billion pounds in 2025), ongoing trade tensions with China (including substantial retaliatory tariffs on whey products), and potential pressure from rising feed costs. This tension between immediate market tightness and bearish long-term indicators suggests dairy markets may face significant volatility as new data on supply, demand, and trade policy emerges in coming weeks.

KEY TAKEAWAYS

• Market Dichotomy: A striking contrast exists between current spot market strength and bearish USDA forecasts, creating potential opportunities for short-term gains but warranting caution for longer-term commitments.
• Component Focus Critical: Producers should prioritize optimizing milk component production (fat and protein) rather than just fluid volume, as this aligns with processor demand and available premiums in the current market.
• Trade Policy Impact: Global trade dynamics, particularly U.S.-China tensions with tariffs up to 150% on whey products, are significantly reshaping export patterns, with Mexico emerging as an increasingly vital alternative market.
• Risk Management Essential: The disconnect between current prices and forecasts, combined with production growth expectations, makes risk management strategies (futures, options, forward contracts) particularly important for protecting against potential price erosion later in 2025.
• Processing Capacity Influence: New cheese processing facilities coming online are creating significant demand pull in certain regions while potentially increasing byproduct (whey, cream) availability that could pressure those specific markets.

The Chicago Mercantile Exchange (CME) cash dairy markets exhibited broad strength on Friday, May 2, 2025, with gains across all major products. Butter and Cheddar Barrels posted the most significant increases, while Nonfat Dry Milk (NDM) and Dry Whey also firmed, despite limited trading activity in some categories. This positive momentum builds on gains observed in the previous session, suggesting strengthening near-term market conditions despite conflicting long-term forecasts.

Key Price Changes & Market Trends

The CME cash dairy markets closed the week with positive momentum across all products, notably in butter and cheese barrels, which both gained 2.00 cents. This price action comes amid reports of tightening inventories for some products and relatively strong demand signals.

Market Commentary:

Butter prices rose by 2.00 cents to $2.3300 per pound, marking a continued recovery through the week. This strength is notable given recent USDA Cold Storage data showing butter inventories 4% above last year’s levels. The current spot price action diverges significantly from the USDA’s latest forecast for the 2025 average butter price, which was recently cut by 7.0 cents to .445 per pound. This suggests immediate market factors such as strong retail or food service demand may outweigh longer-term inventory concerns.

The cheese complex also showed strength, with blocks adding 0.50 cents to close at $1.7600 per pound, while barrels posted a more substantial 2.00-cent gain to $1.7550 per pound. This movement dramatically narrowed the spread between blocks and barrels to 0.50 cents. The stronger performance in barrels today could suggest increased demand for cheese used in processing applications. This spot market strength aligns with reports indicating tighter cheese inventories – American-style cheese stocks were reported down 8% at the start of 2025, and total cheese stocks were down 4.3% year-over-year at the end of March.

NDM prices gained 1.50 cents to settle at $1.1950 per pound despite headwinds from the USDA’s lowered 2025 NDM price forecast ($1.220 per pound) and reports of sluggish export demand in key Southeast Asian markets. U.S. NDM exports to Mexico have remained strong, providing key underlying support.

Dry whey prices increased by 1.75 cents to $0.5200 per pound, which is notable because it occurred despite zero trades being executed, driven instead by unfilled bids. This underlying demand strength persists despite major challenges, including steep retaliatory tariffs imposed by China (reportedly up to 150%) on U.S. whey products.

Volume and Trading Activity

Trading activity on the CME cash markets was generally light on Friday, May 2, especially compared to the previous session.

Butter saw minimal activity, with only one load traded, despite the 2.00-cent price increase. At the close, two bids remained unfilled against one offer, suggesting continued buying interest slightly below the final traded price. This contrasts with the moderate activity (7 trades) observed on May 1.

The trading volume of cheese blocks was moderate, with three loads exchanged. No bids were posted at the close, but one offer remained, potentially indicating sellers were holding out for higher prices. This was lighter than the solid volume (8 trades) on Thursday.

Cheese barrels saw light activity, with just two loads traded, matching the previous day’s volume. Two bids and one offer remained at the close, suggesting a degree of balance near the settlement price.

NDM Grade A trading was light at two trades, a significant drop from the 12 trades executed on May 1. However, strong underlying demand was evident, with four unfilled bids remaining against zero offers at the close.

Dry whey had no trades completed, yet strong buying interest was signaled by three unfilled bids remaining at the close with no offers posted. This follows a light volume (4 trades) on Thursday.

Even as prices increased, the relatively low trading volumes across most products suggest that Friday’s gains were primarily driven by aggressive bidding meeting limited selling interest rather than broad-based market participation.

Global Context

International factors significantly influence U.S. dairy markets, shaping export opportunities and competitive pressures. Exports remain a critical outlet for U.S. dairy solids, accounting for approximately 16% of production.

Export Demand Dynamics:

China remains a pivotal but complex market. Forecasts suggest a decline in Chinese milk production for the second consecutive year (-2.6% in 2025), which could theoretically increase import requirements. However, substantial retaliatory tariffs on U.S. dairy products, particularly whey (up to 150%), severely hinder U.S. access and divert trade flows. While overall Chinese dairy imports surged in March (+23.5% YoY), benefiting competitors like New Zealand, U.S. suppliers face significant hurdles. Demand for specific products like high-protein whey remains strong in Asia, including China.

Mexico and Southeast Asia represent increasingly vital markets for U.S. dairy exports. Mexico has shown strong demand for U.S. cheese, becoming a key destination as exporters pivot away from tariff-impacted markets. Southeast Asia presents opportunities, although recent reports indicated sluggish NDM demand in the region. New Zealand reported strong March export growth to Indonesia (+85% YoY) and Malaysia (+11% YoY), highlighting regional potential.

Global Production Landscape:

New Zealand milk production has shown stable growth through the recent season (+1.2% Feb/Mar, +0.6% March, +2.6% season-to-date), with forecasts projecting continued modest increases (+0.9% for 2025). Producers are increasingly focusing on value-added products like infant formula and specialty cheeses.

The European Union production outlook is mixed, with forecasts ranging from slight declines to modest growth (+0.5%). The region faces significant structural challenges, including declining herd sizes, stringent environmental regulations, and ongoing animal disease risks like the Bluetongue Virus (BTV) and recent Foot-and-Mouth Disease (FMD) concerns in Germany.

Australia is expected to see modest production growth (+1.1%) in 2025, supported by favorable weather and better margins, though higher feed costs remain a factor.

Geopolitical tensions, particularly the ongoing U.S.-China trade dispute and associated tariffs, remain a primary source of disruption and uncertainty for global dairy trade. The complex global dynamic means U.S. market performance will hinge heavily on its ability to maintain competitiveness in accessible export markets and adapt to evolving global supply trends.

Forecasts and Analysis

Market participants continue to grapple with evolving forecasts and underlying production trends. The latest projections from the USDA, primarily reflecting the April World Agricultural Supply and Demand Estimates (WASDE) and related outlook reports, present a more cautious view compared to earlier expectations.

USDA Price & Production Forecasts (April 2025 basis):

The USDA significantly revised its 2025 price forecasts downward. The all-milk price forecast now stands at $21.10 per cwt, a reduction of $0.50 from the March forecast. Similarly, the Class III forecast was lowered to $17.60 per cwt (down $0.35 from March), and the Class IV forecast fell to $18.20 per cwt (down $0.60).

Component price forecasts were correspondingly reduced: Cheddar cheese to $1.790/lb (-2.0¢ from March), Butter to $2.445/lb (-7.0¢), NDM to $1.220/lb (-3.5¢), and Dry Whey to $0.510/lb (-1.5¢).

The 2025 U.S. milk production forecast was increased slightly in the April update to 226.9 billion pounds (+0.7 billion lbs from March). This upward revision was attributed to higher expected cow numbers (+25,000 head) and a marginal increase in anticipated milk yield per cow (+10 pounds).

Feed Cost Trends:

CME futures for feed inputs showed some strength today, with May Corn settling at $4.7300/bushel and May Soybean Meal at $290.40/ton. While feed costs have generally been viewed as more favorable recently than previous peaks, supporting producer margins, any sustained rally in grain prices could pressure profitability later in the year.

Analysis & Market Implications:

A significant disconnect persists between the recent strong performance in the CME spot cash markets and the progressively bearish revisions in USDA’s official price forecasts. Dairy futures markets also reflect this tension; the May 2025 Class III futures contract settled today at $18.43 per cwt, considerably above the USDA’s projected 2025 average of $17.60.

The pattern of consistent downward revisions in USDA milk price forecasts during early 2025 signals an evolving assessment of the market balance, likely incorporating the growing potential for increased milk supply alongside perhaps a more cautious view on demand strength.

The underlying trend of milk solids production (fat and protein) growing faster than overall fluid milk volume is critical. This shift benefits processors focused on manufactured products like cheese and butter and aligns with the demand pull from new cheese plants.

Market Sentiment

Today’s market sentiment can be cautiously optimistic in the near term, buoyed by the firming spot prices across the dairy complex. However, this optimism is tempered by significant underlying uncertainty regarding the accuracy of bearish long-term forecasts, the potential impact of trade policy shifts, and broader economic conditions.

One industry source emphasized the current market tightness: “Spot markets feel well-supported right now, particularly cheese, driven by tight nearby inventories and demand-pull from new plants. Buyers are paying up for immediate needs.” This aligns with the observed price action, inventory reports, and the influence of new processing capacity.

Another perspective highlights the disconnect and risks: “There’s a definite disconnect between the cash market rally and the bearish USDA numbers. We’re closely watching export flows and trade policy – any disruption there, especially with China or Mexico, could quickly change the tone.” This captures the concern over conflicting signals and the high stakes of international trade dynamics.

Key risks frequently cited by industry sources include the potential for escalating trade wars and tariffs, ongoing impacts and uncertainty surrounding Highly Pathogenic Avian Influenza (HPAI) in dairy herds, potential labor disruptions or policy changes affecting farm labor availability, the state of the domestic and global economy influencing consumer spending, volatility in feed costs, and pressures from environmental regulations.

The prevailing sentiment reflects a market reacting strongly to immediate, tangible factors like tight spot supplies and current demand signals pushing prices higher. Simultaneously, there is considerable underlying caution due to future, less certain risks such as higher projected milk production, potential trade disruptions, and weaker official price forecasts.

Closing Summary & Recommendations

In summary, the CME dairy markets closed the week on a firm note, with butter and cheese barrels leading gains, while NDM and dry whey also strengthened despite low or zero trading volumes in some cases. This spot market strength continues to diverge from more bearish USDA price forecasts for 2025. Key drivers appear to be tight nearby inventories, particularly for cheese, aggressive bidding interest meeting limited offers, and potential demand pulls from new processing capacity coming online.

Recommendations:

For Producers: Continue to focus on optimizing milk component production (fat and protein) to capture available premiums, given the market’s clear valuation of solids. Utilize risk management strategies (futures, options, forward contracts) to protect against potential price erosion later in the year, as suggested by lower USDA forecasts and the prospect of rising milk production. Monitor feed cost trends closely, as recent gains in corn and meal could impact margins. Stay informed about HPAI developments and biosecurity measures.

For Traders: Acknowledge the current divergence between spot/futures strength and longer-term fundamental forecasts. Low trading volumes today may indicate thin market depth, potentially leading to heightened volatility. Closely monitor upcoming export data releases, paying particular attention to cheese and NDM shipments to Mexico and Asia. Any developments regarding U.S.-China trade relations or tariffs remain critical market movers.

For Analysts & Processors: Track the operational ramp-up of new U.S. processing facilities and analyze their impact on regional milk procurement dynamics, the availability and pricing of components like whey and surplus cream, and overall market balance. Assess the sustainability of current tight cheese inventories in the face of forecasts for increased milk production. Evaluate evolving global supply and demand balances, noting the significant regional divergences in production trends and market access.

Learn more:

• CME Daily Dairy Market Report: May 1, 2025 – Cheese Prices Lead Gains as Trade Tensions Simmer
• CME Daily Dairy Market Report: April 29, 2025 – Cheddar Blocks Defy Bearish Trends as Butter Plunges
• CME Dairy Market Report: April 16, 2025 – Cheddar Blocks Surge While Barrels Reverse Course; Butter Continues Decline Amid Stable Powder Markets

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