Cheese blocks crashed 1.5¢ in one trade Monday – here’s why your August milk check just took a $0.75/cwt hit.

Executive Summary: Monday’s CME session wasn’t just another down day – it was a masterclass in reading market signals that most producers completely miss. The real insight isn’t the 1.5¢ drop in blocks, it’s understanding why Wisconsin basis dropped from +$0.65 to +$0.35 while California plants are sitting at 115% inventory levels. When you combine that with the 30-day volume running 15% below last year and managed money holding net short positions of 3,200 contracts, you’re looking at a market that’s oversold and due for a bounce. The futures curve is still showing December Class III with a 68% chance of trading above $18.50, which means there’s real money to be made if you understand the timing. Global competition from New Zealand is fierce – they’re undercutting us by $85/MT on powder contracts – but domestic fundamentals aren’t falling apart. Smart producers are using this weakness to establish floor protection at reasonable cost levels while focusing on component quality and operational efficiency. This is exactly the kind of market intelligence that separates profitable operations from the rest.

Key Takeaways

• Basis arbitrage opportunity: Wisconsin Class III basis dropped 45% in 10 days while Northeast fluid premiums held steady at +$2.15-$2.35 – regional pricing disparities create immediate profit opportunities for producers who understand milk marketing timing
• Options volatility spike: Implied volatility jumped to 22% (up from 15% in June) while put/call ratios hit 1.8:1 – establish downside protection through October Class III puts at $18.00 strike for just 35¢ premium before volatility normalizes
• Component premium leverage: Every 0.1 point in butterfat equals $0.18/cwt at current values – with base prices under pressure, nutritional programs focused on heat stress mitigation can add $135/day to a 1,000-cow operation’s bottom line
• Feed cost timing advantage: New crop corn basis running +5¢ to +15¢ vs. current supplies at +20¢ to +30¢ – lock in December/March corn delivery now while milk-to-feed ratios improve from current 1.85 levels
• Export competitive positioning: U.S. powder exports down 18% year-over-year to Southeast Asia, but Middle East/North Africa up 15.8% – diversification strategies and currency hedging become critical for co-ops with international exposure

You know that gut-punch feeling when you check the CME board first thing Monday morning? Well, that’s exactly what we got today. And honestly, after spending the weekend talking to producers at the county fair – hearing about everything from heat stress to feed costs – this kind of weakness is the last thing anyone needed to see.

Here’s the thing about today’s session… when blocks drop 1.5¢ on a single trade, you’re not looking at market noise. That’s a statement. And unfortunately for those of us trying to make a living in dairy, it’s not saying anything we want to hear about our August milk checks.

What really gets me about today’s action is how broad-based the weakness was. Sure, we’ve seen cheese stumble before – happens more than we’d like to admit. But when butter joins the party with a full cent drop? You’re looking at pressure on both your Class III and Class IV formulas. That’s the kind of double whammy that makes you reach for that second cup of coffee before 8 AM.

Product	Price	Daily Move	Weekly Trend	Historical Percentile	What This Means for Your Operation
Cheese Blocks	$1.6450/lb	-1.50¢	-2.3%	35th percentile (July avg: $1.72)	🔴 Your Class III driver just hit a serious pothole
Cheese Barrels	$1.6700/lb	-0.50¢	-2.4%	42nd percentile (July avg: $1.68)	🔴 Industrial demand showing cracks too
Butter	$2.5800/lb	-1.00¢	-0.6%	58th percentile (July avg: $2.54)	🔴 Class IV is taking heat from multiple directions
NDM Grade A	$1.2675/lb	Flat	+0.1%	62nd percentile (July avg: $1.24)	🟡 At least export demand isn’t completely tanking
Dry Whey	$0.5675/lb	Flat	-3.2%	48th percentile (July avg: $0.58)	🟡 Steady today, but that weekly trend…

The silver lining? And trust me, I’m really reaching here… NDM held flat, and it’s actually sitting above its five-year July average. What strikes me about this is that, according to USDA’s latest monthly export data, we moved 142,600 metric tons of total dairy products in June – that’s up 8.2% from the rolling three-month average. So at least the powder complex isn’t completely falling apart.

But let’s be real about what happened with cheese. That barrel-to-block spread widened to 2.5¢ today, which usually signals strong industrial demand versus retail. Problem is, when both are sliding, it’s just different shades of weak.

Under the Hood: Why It Happened

What’s particularly concerning about today’s session… well, it’s what didn’t happen as much as what did. We had one block trade, two butter trades, and that was pretty much it. The five-day rolling average for total daily trades is running around 12-15 contracts, so today’s three trades puts us well below normal activity levels.

Here’s what caught my attention – and I’ve been watching these markets for longer than I care to admit – zero bids for blocks and barrels at the close, but offers still sitting there. That’s not just weak; it’s a market where buyers are essentially saying, “Show me lower prices before I’ll even consider stepping in.”

The bid-ask spreads are telling their own story, too. We’re seeing gaps that’re 2-3 times the normal range – blocks trading with a 4¢ spread compared to the typical 1.5¢. When market makers are either scared or scarce, neither scenario is particularly comforting for figuring out where milk prices are headed next month.

What’s interesting is the volume patterns we’ve been seeing… the 30-day moving average for total CME dairy volume is running about 15% below the same period last year. Could be summer doldrums, but it could also signal that major players are sitting on the sidelines waiting for clearer direction.

The Commitment of Traders Story

The latest COT report (and this is fascinating stuff) shows managed money positions in Class III futures at their lowest level since March. Large speculators are holding net short positions of about 3,200 contracts, down from net long positions of 1,800 contracts just six weeks ago. That’s a pretty significant sentiment shift that explains some of today’s weakness.

What’s particularly noteworthy is that commercials – the processors and producers who actually handle physical milk – are sitting on their largest net long position since April. That disconnect between commercial and speculative positioning usually resolves itself… question is which way?

From what I’m hearing from contacts on the floor, traders are watching $1.60 on blocks like hawks. Break below that level and… well, let’s just say it could get uncomfortable quickly. For barrels, those unfilled offers at $1.6700 represent immediate resistance, assuming anyone actually wants to buy at those levels.

The Futures Curve and Options Tell a Different Story

Here’s where things get interesting – and maybe a little more optimistic. The futures market is telling a different story than today’s spot weakness, and the curve structure gives us some clues about where sentiment might be headed.

Current Futures Structure (and what it means):

• August Class III: $17.76 (vs. today’s spot equivalent around $17.20)
• October Class III: $18.78 (showing $1.00+ premium to spot)
• December Class III: $19.15 (even stronger premium)

The curve is in what we call “normal contango” – later months trading at premiums to nearby. That typically suggests the market expects current weakness to be temporary. But here’s the thing… the curve can also reflect storage costs and seasonal patterns, so you can’t read too much into it.

Options Volatility Patterns: This is where it gets really interesting. Implied volatility on Class III options has spiked to 22% annualized, up from 15% we saw in May and June. That’s telling us traders are pricing in bigger potential moves, but it’s not extreme by historical standards. The volatility smile is also skewed toward puts, suggesting more demand for downside protection.

Confidence Intervals (based on current options pricing):

• August Class III: 68% chance of trading between $17.25-$18.25
• October Class III: 68% chance of trading between $18.15-$19.45
• December Class III: 68% chance of trading between $18.50-$19.80

Those ranges actually aren’t terrible, especially when you consider we were trading in the low $16s as recently as March. The fact that December shows a 68% chance of staying above $18.50 suggests the market still believes in a seasonal recovery.

The View from the Farm: How It Impacts Producers

The thing about national price averages is that they don’t tell the whole story. Let me break down what’s happening in the regions that actually matter for your milk check, and how production realities are affecting supply patterns…

Regional Basis Reality – The Complete Picture

Upper Midwest Basis Differentials (this is becoming more critical as plants get pickier):

• South-central Wisconsin: Class III basis dropped to +$0.35/cwt from +$0.65 ten days ago
• Central Minnesota: Running about +$0.40/cwt, down from +$0.55
• Northern Iowa: Holding around +$0.45/cwt, but processors pushing for lower premiums
• Michigan: Sitting at +$0.30/cwt, down from +$0.50 in early July

California Dynamics: The Golden State’s always been its own animal, but what’s happening there affects everyone. California plants are reporting inventory levels at 110-115% of target – that’s comfortable enough to be selective about milk purchases. Their basis to Class IV has tightened to around +$0.25, down from +$0.45 in early July.

Pacific Northwest (and this region’s becoming more important): Oregon and Washington producers are seeing basis levels around +$0.20 to +$0.30 over Class III. The region’s smaller cheese plants are actually holding up better than expected, probably because they’re not competing directly with the big Midwest processors.

Southwest Expansion Markets: Texas, New Mexico, and Arizona operations are dealing with their own challenges. Basis levels are running +$0.15 to +$0.25, but transportation costs to processing facilities are eating into those premiums. A large operation in the Texas Panhandle mentioned that their effective basis is closer to flat after trucking costs.

Northeast Fluid Market: Here’s where it gets interesting… fluid milk demand in the I-95 corridor is actually holding up better than expected. Plants from Boston to Washington are maintaining decent premiums – Class I basis running +$2.15 to +$2.35 over Class III, which is typical for this time of year.

Production Dynamics and Heat Stress Reality

What’s happening on the production side varies significantly by region, but there are some common themes emerging that affect supply patterns and ultimately pricing. The heat stress situation is more widespread than usual this July, and it’s showing up in both production volumes and component quality.

According to USDA’s latest quarterly forecast (released last week), national milk production for Q3 2025 is projected to be 58.2 billion pounds, up 1.1% from last year, with a confidence interval of +/- 0.4%. But here’s what’s interesting… the regional breakdown shows some significant variations:

• Upper Midwest: Q3 production forecast up 0.8% (confidence range: +0.2% to +1.4%)
• California: Expected to be flat to down 0.2% (confidence range: -0.8% to +0.4%)
• Southwest: Up 2.1% (confidence range: +1.5% to +2.7%)
• Northeast: Up 0.4% (confidence range: -0.2% to +1.0%)

The heat stress impacts are showing up differently across regions:

• Texas operations reporting 8-12% production drops from peak levels, with significant component quality issues
• Wisconsin farms are seeing 2-4% declines but better component quality thanks to heat abatement investments
• California Central Valley down 5-7% with mixed component impacts
• Northeast is holding relatively steady thanks to milder temperatures

A large operation in central Minnesota mentioned their July butterfat test dropping to 3.68% from 3.81% in June – that’s significant money when you’re talking about 3,200 cows. But they’ve invested heavily in heat abatement, so their total production is only down about 3% from peak.

Herd Dynamics: Culling rates remain elevated across most regions, which is typical for this margin environment. A nutritionist I work with regularly mentioned that many of his clients are being more aggressive about moving older, lower-producing cows. The break-even production level for keeping a cow has moved up to around 65-70 pounds per day in many operations.

What’s particularly noteworthy is the heifer situation. Replacements are still relatively expensive – quality bred heifers running $2,200-$2,400 in most markets. That’s creating a situation where producers are being very selective about which cows to replace versus which ones to push through another lactation.

Feed Markets: The Other Half of Your Margin Equation

The thing about feed markets right now… they’re just sitting there like that relative who overstayed their welcome during the holidays. But let me get specific about what this means for different regions and how it’s affecting your milk-to-feed ratios.

Current Feed Landscape (and these numbers matter for your bottom line):

• December corn futures: $4.12/bushel (down from $4.35 six weeks ago)
• March corn: $4.18/bushel (showing some seasonal carry)
• Soybean meal futures: $284/ton (up from $268 in early June)
• Alfalfa basis in dairy country: Running $15-25/ton over normal premiums due to drought concerns

Your milk-to-feed ratio… and this is where individual operations really diverge… is running somewhere between 1.75-1.95 depending on your location and sourcing strategy. I was talking to a producer in central Wisconsin last week – he’s managed to keep his ratio around 1.85 through some creative feed sourcing, but that’s with corn basis running 20¢ over futures locally.

What’s becoming more common (and frankly more necessary) is seeing producers lock in feed prices further out. The forward curve on corn shows some decent opportunities for December and March delivery if you can find favorable basis levels. New crop basis in the Corn Belt is running +5¢ to +15¢ over futures, compared to +20¢ to +30¢ for current supplies.

Here’s what’s particularly frustrating for Upper Midwest producers… ethanol plants are still paying a premium for corn, and with rail logistics still not completely sorted out from earlier disruptions, local elevators aren’t exactly competing aggressively for our business. Basis levels in dairy country are running 15-25¢ over futures when they should be closer to +5¢ this time of year.

Regional Feed Cost Variations:

• Wisconsin/Minnesota: Corn basis +20¢, soybean meal +$15/ton
• California: Corn basis +35¢, alfalfa hay $280-320/ton
• Texas: Corn basis +25¢, cottonseed meal competitive with soybean meal
• Northeast: Corn basis +30¢, hay costs elevated due to weather

The Global Picture: External Pressures

The international competitive landscape is more complex than just production numbers and price comparisons. Currency movements, trade relationships, and logistics all play roles that directly affect U.S. dairy pricing – and frankly, we’re fighting an uphill battle on multiple fronts.

Export Competition Reality – The Detailed Numbers

Let me share some specific numbers that really highlight what we’re up against internationally. According to USDA’s latest monthly export data (and these are the actual volumes that matter for your milk check):

June 2025 Export Performance vs. June 2024:

• Mexico: 31,200 metric tons total dairy products – up 2.1% from May, down 1.8% year-over-year
• Southeast Asia: 22,400 metric tons – down 8.3% from May, down 18.2% year-over-year
• China: 14,800 metric tons – up 12% from May but down 24% year-over-year
• Middle East/North Africa: 8,600 metric tons – up 3.1% from May, up 15.8% year-over-year
• Canada: 7,400 metric tons – steady from May, up 4.2% year-over-year

Rolling Three-Month Averages (this smooths out the volatility):

• Total dairy exports: 142,600 MT/month (up 8.2% from the same period in 2024)
• Cheese exports: 38,200 MT/month (up 3.1% year-over-year)
• Powder exports: 68,400 MT/month (down 2.8% year-over-year)
• Whey exports: 35,800 MT/month (up 12.4% year-over-year)

Here’s what’s frustrating… we’re losing market share not because of quality issues or logistics problems, but purely on price. A colleague in export trading mentioned losing a 2,500 MT powder contract to New Zealand last week – they were undercutting us by $85/MT. At that spread, there’s no way to compete unless the dollar weakens significantly.

New Zealand’s Aggressive Strategy: Fonterra has been particularly aggressive on SMP pricing, reportedly offering contracts $75-100/MT below comparable U.S. product. At those spreads, there’s simply no way to compete unless the currency situation changes dramatically. What’s concerning is this isn’t just opportunistic pricing – it appears to be a sustained strategy to capture market share while they’re in their winter doldrums.

Global Production and Currency Dynamics

The European situation adds another layer of complexity. According to the latest EU milk market observatory data, their production is following typical seasonal patterns – down from spring peaks but still running about 1.8% ahead of last year in key regions like Germany and the Netherlands. Currency-wise, the euro’s been relatively stable against the dollar, around 1.08-1.10, so we’re not getting help there either.

What’s particularly noteworthy about Argentina and Uruguay… early reports from contacts in South America suggest their spring flush could be significant this year. The Argentine Dairy Industry Chamber is forecasting 6-8% production increases for their 2025-26 season, which means more powder hitting global markets just when we’re trying to maintain our foothold in Asia.

Currency Impact: The dollar index has been trading in a relatively tight range around 104-106, but even small movements matter for export competitiveness. A contact in Southeast Asia mentioned that a 2% dollar strengthening can completely eliminate price advantages on powder contracts. Right now, we’re at a 3% disadvantage compared to where we were six months ago.

Logistics Reality: Shipping costs from U.S. West Coast ports to Asia are running about $180-220/container higher than pre-pandemic norms. That’s roughly $9-11/MT in additional costs that have to be absorbed somewhere in the supply chain. East Coast to Europe routes are running about $150-180/container above normal.

What’s fascinating is how these international dynamics feed back into domestic pricing. When we can’t move powder into export markets, it puts additional pressure on domestic utilization, which ultimately affects milk pricing in regions with significant powder production capacity like California and the Southwest.

Trade Policy Wildcards

Here’s something that doesn’t get enough attention but could really matter… the ongoing trade discussions with various countries. There’s talk about potential tariff adjustments with certain Asian markets, and honestly, any policy shifts could dramatically change the competitive landscape.

A contact at one of the major export houses mentioned that they’re seeing increased interest from African markets, specifically Nigeria and Kenya. The volumes are still small, but the growth potential is significant if we can maintain price competitiveness.

The Game Plan: What to Do About It

Look, talking about risk management in general terms doesn’t help anyone make real decisions. Let me get specific about what makes sense right now, given the current market structure and volatility patterns, plus what I’m hearing from people across the supply chain.

Market Sentiment and Real Voices

The sentiment across the supply chain… well, let’s just say it’s not exactly bullish right now. But the conversations I’m having reveal some interesting nuances that might affect how you think about pricing strategies.

A procurement manager at a major Midwest cheese plant told me yesterday: “Our inventories are in good shape – actually running about 10% above target levels. We’re not chasing milk right now because frankly, we don’t need to. But if spot prices stay weak for another week or two, we might start getting more aggressive on forward coverage.”

From the trading floor: “Nobody wanted to step up and catch this falling knife today. Volume was pathetic. But here’s the thing… when markets get this thin, they can turn on a dime. I’ve seen it happen too many times to count.”

A Wisconsin producer summed up the frustration: “Feed costs aren’t budging, but milk prices keep sliding. The good news is we locked in some fall coverage at $18.50 last month. Looking at today’s action, that’s feeling like a pretty smart decision.”

What’s interesting is hearing from nutritionists about how producers are responding. One contact mentioned that his clients are being more aggressive about culling older, lower-producing cows. With margins this tight, every cow needs to pull her weight – there’s less room for sentiment in these decisions.

Risk Management Reality: Specific Strategies for Today’s Market

Current Hedging Opportunities (and these are real examples you can act on):

• October Class III puts at $18.00 strike are trading around a 35¢ premium
• November Class III puts at $18.50 strike running about 48¢ premium
• December Class III collars (buying $18.00 puts, selling $19.50 calls) can be established for about 15¢ net cost

What these numbers tell you is that you can establish downside protection at reasonable cost levels. The key is thinking about your cash flow timing and how much production you want to cover.

Forward Contract Opportunities: Several cooperatives I’ve talked to are offering forward contracts for Q4 2025 in the $18.20-$18.60 range, depending on volume and timing. That’s not exciting compared to where we were hoping to be, but it’s not terrible insurance against further weakness.

Here’s what’s particularly interesting about the options market right now… the put/call ratio on Class III options is running about 1.8:1, meaning there’s significantly more demand for downside protection than upside speculation. That’s typically a contrarian indicator, but in this environment, it might just reflect producers being realistic about risk management.

Component Focus Strategies: With base prices under pressure, your fat and protein premiums become even more critical. Every tenth of a point in butterfat is worth about $0.18/cwt at current component values. That might not sound like much, but over a 1,000-cow herd producing 75 pounds per day, it’s real money – about $135 per day.

Seasonal Expectations and Reality Checks

Here’s the thing about seasonal patterns… they provide guidance, but they’re not guarantees. Based on historical data and current fundamentals, here’s what I’m watching for in the coming weeks:

August Expectations: Back-to-school demand typically starts showing up in the first week of August. Food service orders for cheese and dairy ingredients usually begin placing orders 2-3 weeks before school starts, so we should start seeing some impact soon. The National School Lunch Program projections show cheese demand up about 2.3% for the upcoming school year.

Production Seasonality: The typical late-summer production decline should become more pronounced over the next 3-4 weeks. Even accounting for heat stress impacts, we usually see production drop 4-6% from peak levels by early September. This year’s heat stress might accelerate that decline.

Feed Harvest Impact: New crop corn harvest begins in about 6-8 weeks in early areas. Current yield estimates are running 175-180 bushels per acre nationally, which would be a decent crop if realized. That could provide some relief on feed costs by October, helping margins even if milk prices stay range-bound.

But here’s the reality check… international competition isn’t seasonal. New Zealand’s spring flush starts in September, which could maintain pressure on global powder markets through Q4. That’s a wildcard that historical seasonal patterns don’t account for.

Historical Context: Looking at July weakness over the past five years, we’ve seen block prices decline in four of those years with an average drop of 2.8¢. Today’s 1.5¢ decline puts us right in that historical range. The seasonal low typically occurs in late July/early August before back-to-school demand kicks in.

The Bottom Line: Navigating Uncertainty with Clear Eyes

Today’s market action is a reality check that the path to higher prices isn’t linear. The 1.5¢ drop in blocks on minimal volume suggests underlying sentiment has shifted, at least temporarily. But when I step back and look at the bigger picture…

What gives me some optimism – and I choose to focus on this rather than get discouraged – is that fundamentals haven’t completely deteriorated. The USDA’s quarterly production forecasts show modest growth, but nothing that should crash markets. Export demand, while challenging, isn’t collapsing entirely. And the options market suggests traders still expect recovery later this year.

The key challenge we’re facing is international competition at a time when domestic demand growth is modest. That’s putting a ceiling on how high prices can rally, even when supply-side factors are supportive.

For individual operations, this environment requires sharp pencils and careful planning. Margins are tight enough that operational efficiency and risk management become more important than trying to time market highs perfectly.

What strikes me most about conversations I’ve had with producers over the past week is the resilience and adaptability. Yeah, margins are tight, and today’s weakness is disappointing. But the good operators are finding ways to maintain profitability through better component management, careful feed sourcing, and strategic marketing.

Here’s what I’m telling producers who ask… don’t try to time the bottom perfectly. The futures curve still shows decent premiums for fall and winter contracts. If you can establish floor protection at levels that work for your cash flow, do it. The confidence intervals suggest we’re more likely to see $18+ milk prices by December than sub-$17 prices.

Sometimes markets just need to reset before moving higher. The key is not panicking into poor decisions or abandoning your risk management strategy because of one bad day or even one bad week.

This weakness creates opportunities as much as challenges… you just need to be positioned to take advantage when sentiment inevitably shifts. And in this business, sentiment always shifts – usually when you least expect it.

Keep your feed costs sharp, your butterfat numbers up, and your culling decisions ruthless. Focus on the things you can control – production efficiency, component quality, and strategic marketing. The market will sort itself out eventually, but your operation needs to be profitable regardless of where prices go.

We’ve weathered these storms before, and we’ll get through this one too. Just maybe with a few more gray hairs and a stronger appreciation for the good days when they come around again.

Complete references and supporting documentation are available upon request by contacting the editorial team at editor@thebullvine.com.

Learn More:

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• 5 Technologies That Will Make or Break Your Dairy Farm in 2025 – Uncovers cutting-edge automation and AI technologies delivering 15-20% productivity gains and 40% mortality reductions, providing the competitive edge essential for thriving when markets turn volatile like today’s session.

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