Supply and demand in the dairy industry

We are setting up for an interesting and potentially volatile dairy market in 2025. We have the normal supply and demand drivers to contend with plus the unknowns around government policy, animal disease, a record amount of new cheese processing capacity coming online and changes to the Federal Milk Marketing Order pricing formulas. It’s always hard to write a long-term outlook, but it feels especially hard right now.

Let’s start with the milk supply. Animal disease issues have been a significant story on the supply side during 2024 and early 2025. First, bird flu made the jump to dairy cows in the U.S. and is continuing to spread in early 2025. Then blue tongue showed back up in Europe and dented milk production there over the summer. Then in mid-January foot and mouth showed up in Germany. As of this writing, there is only one case of foot and mouth confirmed in Europe. If the spread is contained, the impact on milk supply will be minimal, but if it spreads widely, we could see a lot of dairy cattle destroyed to stop the spread.

Blue tongue will probably ramp back up in the spring, but between vaccines and natural immunity, the impact will probably be weaker than what we saw in 2024. There are still a lot of unknowns around bird flu in the U.S. The federal government is stepping up testing nationally, but aggressive testing was done during the outbreaks in California and Colorado and (as of writing) 60-70% of the dairy farms in those states had confirmed infections. More testing is probably a good thing and might help to slow the spread a little, but I think we have to assume bird flu is going to continue to spread and will still be part of the supply story in 2025.

Nate Donnay is the director of dairy market insight at StoneX Financial Inc. He has been applying his interest in large complicated systems and statistical analysis to the international and U.S. dairy markets since 2005.

Milk margins up, retail cheese demand strong

Despite the animal health issues, higher milk prices in 2024 combined with lower feed costs pushed margins for dairy farmers up to profitable levels and we are seeing stronger milk production, at least in areas that aren’t currently experiencing a bird flu outbreak. So, the underlying trend is toward stronger milk production growth in 2025, but there is some risk that disease-related issues hold back supply.

The demand side is almost always tougher to wrap your head around and to forecast. At the macro level, fears of recession have faded and it looks like the Federal Reserve was able to pull off a soft landing. But there are some signs of stress at the consumer level, particularly for lower income households. The metrics don’t look shockingly bad, but a lot of indicators have returned to pre-pandemic trends after a few years of being better than usual.

Demand for dairy products has been very mixed. It looks like retail cheese demand has been strong, but foodservice cheese demand has been soft. Retail butter demand was flat for most of 2024 before getting a bump around the holidays while the data suggests foodservice demand for butter has been strong., This strong foodservice butter market is at odds with the cheese foodservice market which has been weak.

Domestic demand for nonfat dry milk has been weak as cheese and yogurt makers are switching away from using nonfat dry milk (NFDM) as an ingredient and using more condensed milk products instead. The big standouts on the demand side are high-protein milk powders. It looks like domestic use of whey protein isolate was up about 37% in 2024 and domestic use of milk protein concentrate was up about 63%. Consumers are looking for ways to get more protein and dairy powders, either in drinks or added to packaged goods, both are a great way to do it.

Tariffs and trade

U.S. exports have been a mixed bag. Cheese exports, especially to Mexico, have been better than expected while NFDM exports (also largely to Mexico) have been weaker than expected. But the big concern moving forward is potential trade tensions/wars. While there was a lot of fear around what would happen to trade flows and prices when China and Mexico put additional tariffs on U.S. products during the first Trump administration, looking back at the data, U.S. exporters found other homes for the product and the impact on prices was relatively small.

Whether we end up seeing a big impact from trade disputes depends on too many factors to say, but it is hard to argue that trade disputes, by themselves, would be short-term bullish for dairy demand and prices. However, the first Trump administration was quick to offer direct payments and some bulk commodity purchases to try and offset negative price impacts from trade disputes. If they aggressively purchase commodities, it’s possible a trade dispute could end up pushing dairy prices higher for a period of time.

Lastly, we have a record amount of new cheese plant capacity that will come online between late 2024 and mid-2025. The presumption is that a lot of money has been invested in these plants, so whether the cheese is needed or not, they are going to run milk through the plants and start producing cheese which could swamp the market.

My argument is that cheesemakers have been doing a good job of matching production to sales during 2024, in fact, they underproduced and left cheese stocks about 100 million pounds lower than the prior year in November. So, the new plants will start up, but production at other plants will probably be reduced. Another big question is whether changes to the Federal Milk Marketing Order pricing formulas will make cheese production more profitable and potentially cause cheese plants to increase production even if they don’t have sales lined up.

Overall, I think the industry is primarily worried about the downside for dairy prices in 2025, either due to the growing milk supply, new cheese plants, ample cream supplies or the fact that wholesale price index (WPI) prices are at record highs and can’t stay this high forever. When everyone is worried about prices going down, everyone stays short. In that type of environment, any type of bullish surprise (animal disease, government purchasing program, drought, export demand) can quickly push prices higher which is why 2025 might be a volatile year for dairy prices. DF