2025 Dairy Market and Policy Outlook

Volume 19, Issue 1
January 2025

Contributed by Dr. Christopher Wolf, Cornell University

2024 Review

With respect to dairy farm profit, 2024 began with weak margins. By the third quarter, milk prices were strong (above $23/cwt) and feed prices were weak (corn less than $4/bu), resulting in record high margins near $16/cwt (Figure 1). Class IV prices remained strong driven by butterfat demand while Class III prices were respectable but not outstanding.

Figure 1. Actual and Projected Income Over Feed Cost Margins

U.S. milk production languished being lower year over year for the first seven months of 2024 before recovering to marginally higher for August through October. Through October, milk per cow had increased very slightly (+0.4%), while cow numbers were up 10 thousand head (+0.1%). This sluggish milk volume was offset by butterfat supply response. Through the first 10 months of 2024, total butterfat production was up 2% compared to 2023.

Over the past two decades, the U.S. became a major dairy exporter. Prior to 2004, the U.S. exported and imported about the same amount in milk equivalent dairy products. Imports were — and still are — largely made up of high value dairy products (such as specialty cheese), while exports were commodities including skim milk powder and dry whey. The U.S. now exports more cheese and other dairy products but continues to primarily export skim milk powder, whey and lactose products. The result is that increases in butterfat production are largely consumed domestically, while the skim products are exported.

The high margins in recent months sent a signal to increase milk production. However, U.S. milk supply response has been dampened by a couple of factors, including Highly Pathogenic Avian Influenza (HPAI) and tight heifer supplies. To date, HPAI has been confirmed in cattle in 16 states. Recent infections have largely been in California which, in October 2024, was down 3.8% over a year earlier in milk production. USDA recently announced a comprehensive HPAI testing plan as well as vaccine trials. 

Heifer numbers tightened in the past couple of years as sexed semen allowed dairy farmers to pick dams for replacement heifers and have the rest produce beef cross bull calves. High beef prices, driven by beef cow numbers at their lowest value in seven decades, have generated a welcome profit center with beef-dairy cross calves. Tightness in the dairy heifer market is reflected in replacement prices reaching historic highs in the July 2024 USDA statistics.

Disease is also an important part of the global dairy situation. While the U.S. struggles with Highly Pathogenic Avian Influenza (HPAI), Bluetongue, a viral disease that sickens cattle, spread rapidly across northwestern Europe. A highly virulent form of the disease transmitted by biting insects, Bluetongue first occurred across Dutch farms and has since caused outbreaks in Germany, Belgium, France, Luxembourg, and Denmark. The disease is estimated to decrease milk production by two pounds per cow per day for many weeks. Infected dairy cows also suffer from fertility issues that may cause the loss of pregnancy.

With the first three quarters of 2024 recorded, U.S. milk production was down a bit, EU milk production was up marginally, while Australia and particularly New Zealand milk production grew by a healthy amount year over year. In aggregate, global milk production was lower in 2024 compared to a year earlier, bolstering farm milk price.

Domestically, butter prices are down a bit over a year earlier, while cheese prices are higher and domestic commercial disappearance is steady. Of the major dairy products the U.S. exports, in 2024 cheese and dry whey exports increased, while nonfat dry milk/skim milk powder and lactose exports declined. China, the largest single importer of dairy products, backed off import levels in 2024 related to ongoing economic issues.

2025 Market Outlook

As of year-end 2024, Class III and IV milk prices are projected to be steady to a bit lower by the second half of 2025. Feed costs are similarly consistent, with the resulting margin trending lower but remaining above historic average, and Dairy Margin Coverage payment ($9.50/cwt), levels (Figure 1). This forecast takes into account the state of market information as of December 2024. As always, there are significant potential unknowns on both the supply and demand side.

Weather risks are a primary consideration for both milk and feed production not just in the U.S. but globally. Related, weather affects diseases like HPAI that have a seasonal incidence. Vaccines for HPAI or Bluetongue would help production but may not be likely in 2025. 

The incoming presidential administration presents unknowns related to tariffs and immigration. With U.S. corn stocks almost 30% higher than a year ago, export opportunities will be key for domestic grain prices. Mexico is the largest importer of U.S. corn so any tariff retaliation would affect price. Also, Mexico and China are the most important destinations for U.S. dairy exports, and both have been subjects of recent tariff threats. 

In 2018-2019, retaliation from tariffs on imported goods from China contributed to a significant decline in U.S. dairy exports. Threats of that type also led to a renegotiation of NAFTA (now USMCA). Since that time, however, New Zealand has gained increased access to Mexican markets under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) trade agreement from which the United States withdrew. With new U.S. cheese production coming online, maintaining or, better yet, growing export markets will be increasingly necessary to generate profitable farm milk prices.

Dairy Policy

Federal Milk Marketing Order (FMMO) modernization is being voted on at the time of this writing. FMMO had not been updated nationwide since 2008. Assuming it passes, the changes will be implemented during 2025. Key modifications include increasing make allowances which had not been increased since 2008 and increasing Class I price differentials across the country. Other changes include updating milk composition factors to reflect higher protein, dropping 500-pound barrels from the cheddar cheese price, and returning to the higher of Class III or IV advanced skim milk price for setting Class I skim price. 

The impact of these changes will depend on location and cooperative or processor situation (product, facilities and contracts). Increasing make allowances will, all else equal, lower farm milk price. The other changes are generally expected to increase farm milk price, but the impact depends on utilization and the factors mentioned above. 

In general, the impact is expected to be negative for farm milk price in the Upper Midwest, Pacific Northwest and California and positive for the Southeast, Florida and Appalachia Orders. The Northeast Order is expected to have a small, positive impact at the farm level in the short term — but again that depends very much on farm and cooperative specifics.

On December 21, 2024, Congress enacted a one-year extension of The Farm Bill. Extending the Farm Bill maintains the status quo for the Dairy Margin Coverage program, while a new bill, enacted at some point in 2025 might increase the Tier 1 eligible milk production and update production base.

Editor: Chris Laughton
Contributors: Dr. Christopher A. Wolf and Chris Laughton

Dr. Christopher A. Wolf E.V. Baker Professor of Agricultural Economics  Dyson School of Applied Economics and Management Cornell University

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2025 Dairy Industry Outlook Webinar

On Wednesday, January 22, 2025, at 12:00 PM EST join Farm Credit East, Horizon Farm Credit and Dr. Christopher Wolf of Cornell University for an outlook on what 2025 may bring us in global dairy markets.

Tags: outlook, ag economy, dairy