American dairy producers faced one of their toughest financial periods in recent years as January milk prices settled well below production costs, yet the industry continued expanding rather than contracting.
Class III futures finished January at $14.58 per cwt., while Class IV dropped even lower to $13.57—both several dollars beneath typical farm production costs. Despite these challenging margins, December data shows U.S. dairy producers milked 9.567 million cows, representing a 212,000 head increase compared to the previous year.
The financial pressure did trigger some industry adjustments. After 15 months of unusually low cull rates, dairy cow slaughter volumes returned to more typical levels throughout December and January as producers removed lower-yielding animals and some operations exited the industry while assets retained value.
Herd expansion slows but stability expected
Following a period of rapid barn construction and herd expansion to supply new and expanded processing facilities, the rush to add capacity has largely concluded. Producers added 9,000 cows in December after modest declines in October and November.
USDA’s annual dairy heifer inventory indicates stability ahead, with 3.914 million heifers expected to calve and enter milk production in 2026—slightly fewer than last year. These numbers remain at multi-decade lows, close to 2023 and 2024 levels. While genetic improvements in milk yields and longevity enable producers to maintain current herd sizes, the data suggests rapid expansion beyond 2025’s significant increase will prove more difficult.
Industry analysts expect U.S. milk-cow numbers to hold roughly steady through the first half of 2026, as margins have not remained low enough for long enough to push substantial numbers of producers toward exits.
Record milk output driven by multiple factors
Higher head counts combined with genetic advancements, improved management practices, and the absence of avian influenza drove December milk production 4.4% above the prior year. Annual 2025 U.S. milk output jumped 2.8%—the largest yearly increase since 2005.
The surge in milk production and strong component levels resulted in significantly higher manufacturing volumes. Through November, U.S. butter production increased 6.6% while cheese output rose 2.8% compared to the first eleven months of 2024.
Strong demand prevents inventory buildup
Despite substantially higher production volumes, dairy products did not accumulate in warehouses. Demand for high-protein dairy products kept whey powder inventories in check, while booming exports pulled December butter stocks below year-ago volumes.
December 31 cheese inventories stood just 1.8% above late 2024 levels—lower than year-end stocks in 2020, 2021, 2022, and 2023. The weak dollar and low dairy product prices drove strong export demand.
Powder markets rally sharply
As other dairy processors absorbed more milk, powder production declined significantly. November milk powder output dropped to the lowest monthly total in over a decade, setting the stage for a dramatic price recovery.
CME spot nonfat dry milk surged 28.5¢ per pound in January—a 24% increase that pushed prices to their highest level since October 2022. CME spot butter gained 18¢ to reach $1.58, a three-month high, as the market reassessed supplies following smaller-than-expected inventories. Whey prices added 1.5¢ to close at 75¢, while spot Cheddar declined slightly by 1.25¢ to $1.3625.
Price recovery offers relief
While dairy producers face difficult January revenues and a relatively small February milk check, futures markets project significantly improved returns ahead. March through April Class IV futures climbed an average of $2.57 in just 31 days, with both Class III and IV futures indicating $16-$17 milk prices in coming months.
These projections represent substantial improvement over late-December expectations. The rapid 31-day recovery has exceeded industry expectations, though questions remain about whether the price strength can be sustained through the remainder of the year.
This newsarticle is part of a more comprehensive analysis on the US dairy market. For the full analysis, visit: https://app.vespertool.com/market-analysis/2655.
