Dairy Markets Show Both Upside and Concern

Volume 19, Issue 
June 2025

By Corey A. Geiger, CoBank, Lead Economist, Dairy and Abbigail C. Prins, Cobank, Industry Analyst

From a farmer’s perspective, global agricultural commodity markets, outside of beef and eggs, have been somewhat shaky. There are a multitude of reasons including less than stellar consumer confidence that can cause a pullback on spending and market tribulation caused by tariffs and global trade. 

When looking at the U.S. dairy situation, markets have potential for both upside and downside movement. Upside because retail sales remain rather strong. Downside due to sluggish restaurant sales. Upside because most U.S. dairy products and ingredients remain the lowest priced among the big three dairy exporters, making the U.S. a good buy. Downside because of potential tariff implications and shipping costs. 

High priced cows

One thing is for certain when looking at the supply side of the equation, U.S. dairy producers have a limited ability to boost milk production, which could help buoy milk checks. This is documented by dairy replacement inventories that stand at the lowest levels in over two decades. In addition, dairy replacements values have pushed deep into record territory. 

This April, USDA reported the average price for a dairy herd replacement that is ready to enter the milk barn averaged $2,870. That’s up from $2,120 per head the same time last year. Those dairy farmers looking for dairy replacements know that this $2,870 figure is merely an entry point as premium dairy replacements have demanded as much as $4,000 each at auctions across the United States this spring.  

Through April 2025, the U.S. dairy cow herd was up 101,000 head when compared to the start of 2024. However, that gain in dairy cow numbers to reach a 9.425 million head total has less to do with replacement inventories and more to do with a historic pullback on culling. 

The 600,000-cow pullback 

The big pullback in dairy cow culling started Labor Day 2023. In the final 18 weeks of that year, dairy farmers sent 140,500 fewer dairy cows to slaughter when compared to the previous year. This big pullback continued throughout 2024 as 367,400 fewer head of dairy cows went to slaughter as dairy farmers looked to shore up herd numbers when faced with fewer heifers. To start this new year, the pullback on culling continued to the tune of 94,300 head through May 17, 2025, based on USDA slaughter data. All told, dairy farmers have sent 602,200 fewer cows to slaughter over the past 90 weeks. 

Keep in mind that this historic pullback is taking place even as beef prices continue to set new records. If any downward shift takes place in margins to make milk, the milking herd could see a rather quick sell down to capitalize on these hefty returns. 

This historic pullback in culling has additional long-term implications. For years, dairy farmers utilized first lactation pens as those young cows have unique needs when compared to older herd mates. Now that dairy farmers are keeping cows longer, these older parity cows also have unique needs and can become more prone to issues such as mastitis, lameness, and infertility just to name a few. To overcome these potential hurdles, dairy farmers and their advisors should have conversations about more effective handling of older cows as the dairy replacement pipeline shows no signs of filling during the next two years. 

Europe has its issues, too

The U.S. isn’t the only region that is having issues with herd numbers. EU dairy cow numbers fell from 19.9 million to 19.2 million head from 2023 to 2024. Among the top EU dairy countries, all faced headwinds with Germany down 3.3%; France off 2.9%; Poland decreased 12.6%; Italy dropped 2.4%; and the Netherlands and Ireland each fell 2%. Together these six countries represent 70% of the dairy cows in the EU group of 27 countries. 

This region is important to global dairy as it’s the world’s largest dairy product and ingredient exporter. Overall, the EU exports 20% of its total milk production via dairy products and ingredients. There are two reasons that the EU may have sluggish milk production this season. Top of mind is blue tongue. Overall, the continent had a rather mild winter and that could lead to the rise of more biting midges that transmit the blue tongue virus. Like mosquito larvae, midge larvae tend to fair better during in mild winters. 

More concerning is an outbreak of Foot and Mouth Disease in Hungry, Slovakia, and now in the Middle Eastern country of Kuwait. The only two ways to keep that disease at bay are vaccination or full-scale slaughter of dairy herds. From my conversations with European veterinarians, people are on edge over this matter. Back in 2001, Great Britian had a major outbreak and over 6 million cows and sheep were slaughtered and either buried or incinerated to overcome the disease. 

A look towards demand 

Over half of dairy products and ingredients get moved through food service. This is especially important for the king of cheese – Mozzarella. To that end, major pizza chains have posted sluggish sales. In the first quarter of 2025, Pizza Hut’s sales were down 5%, Papa John’s were off 3%, and Domino’s, the largest in the category, fell 0.5% when looking at same-store sales. On the flip side, Taco Bell, Pizza Hut’s Yum brand sister store, posted 9% growth, with the help of price promotions. 

While tariffs have been making headlines throughout the world, U.S. dairy prices have slid below those among the big three dairy exporters – the EU, New Zealand, and the U.S. That propelled American exports as U.S. dairy is a good buy. 

Butterfat exports were 203% higher than a year ago in March at 17.9 million pounds, according to the U.S. Dairy Export Council. Canada was a major buyer as sales volume grew 172% compared to the same time last year. The first three months of butterfat exports in 2025 are the equivalent of over half of butterfat exports last year. Overall, U.S. butter prices continue to be discounted compared to the two largest global dairy exporters – the EU and New Zealand. 

While March 2024 still holds the record of 110 million pounds of cheese exported in one month, March 2025 secured the No. 2 spot at 109 million pounds. Mexico remains the top U.S. dairy customer and purchased 95.5 million pounds of cheese in the first quarter of 2025. 
These two major developments caused March 2025 to be the largest monthly U.S. export volume since February 2023. 

Turning towards the farm … margins for dairy producers slipped in March to $11.55 per cwt. due to falling milk prices, based on data from the Dairy Margin Coverage (DMC) program. This margin is calculated using the All-Milk price minus corn, soybean, and alfalfa feed costs, and does not include other expenses or revenues on farm. DMC is forecasting an 85% chance that no indemnity payments will be sent out in 2025, as the margin threshold will likely remain above $9.50 per cwt. 

As for dairy demand, milk prices could have upside if domestic restaurant sales would pick up momentum. However, if dairy exports falter and restaurants sales remain sluggish, dairy markets will be hard pressed to experience much upside. 

Does the U.S. need more butterfat? 

Record farmgate butterfat production, suppressed cream multiples, and butter churns running at capacity have been major themes to start out this year. These market circumstances have caused some ask, “Are U.S. dairy farms producing too much butterfat and outstripping consumer demand?” 

It’s a worthy question as butterfat production is booming. From a national perspective, milk production, measured in pounds, grew just 15.9% from 2010 to 2024. However, butterfat pounds nearly doubled milk production’s during that same period, leaping 30.6%. 

Cows are quickly changing

In late February, Jonathan Lamb, a New York dairy farmer, and Corey Geiger, were invited to make presentations focused on “Why milk components matter more than milk production” at the 101st USDA Agricultural Outlook Forum. During the discussion, Lamb shared data indicating that his first and second lactation cows completed lactations averaging 5.0% butterfat. Meanwhile, Lamb’s fifth and greater lactation cows ranged from 3.5% to 4.4% butterfat content with levels falling in each successive lactation. 

This is powerful data. Those cows, with 3,367 completed lactations in the past year, are under the same management, and the data indicates how much genetics and genomics have created a seismic shift in butterfat. Plus, there’s another impressive observation – these butterfat percentages are from a Holstein herd and represent levels not seen in the history of U.S. Holsteins. 

Nationally, another dataset documents the growth in sweet cream seeking a home at dairy processing plants. According to Federal Milk Marketing Order data, butterfat percentages climbed from 3.80% to 3.94% from March 2015 to March 2020. However, that shift accelerated from March 2021 to March 2025 as butterfat moved from 4.01% to 4.33%. 

While percentages document the trend, pounds matter to processors. In January 2025, U.S. butterfat production grew 3.0% compared to the same time last year and February 2025 moved 4.0% higher year-over-year. This confirms reports from processors that ample cream supplies exist and that it’s a buyer’s market for those making butter, ice cream, sour cream, heavy creamers, and other full-fat products.

Demand signals

The biggest market signal is per capita butter consumption, which climbed to 6.5 pounds per capita in the latest USDA data set. This represents the highest level since 1965 when the U.S. had 195 million people compared to 345 million this year. Now, there are 150 million more people consuming butter which is a major multiplier. 

Butterfat now absorbs 18% of the U.S. milk supply on a milkfat basis, up from 16% in 2000. Cheese consumption has achieved new record highs, and more milk is being allocated into the category. In 2000, 38% of the milk supply went into making cheese and has since moved up to 42%. 

As one would expect, butter production has powered to a new record at 2.2 billion pounds in 2024. Even at that lofty number, the U.S., as it turns out, cannot produce enough butter. This is a significant reason the U.S. has opportunity to grow its butterfat production. 

In 2011, the U.S. imported 10 million pounds of butterfat, anhydrous milkfat, and butter oil, according to USDA’s Economic Research Service. By 2015, that import figure climbed to 52 million pounds and nearly doubled to 100 million pounds in 2021. Last year, the U.S. imported a whopping 172 million pounds. Yes, the U.S. is importing nearly 8% of its milkfat needs if one compares the 172-million-pound import figure to the 2.2 billion pounds produced domestically last year. 

Butterfat exports offer opportunity

Export markets present another opportunity. While the U.S. exports roughly 16% to 17% of its milk production as dairy products and ingredients, there is a dichotomy in the data. On a full-fat basis, the U.S. exported just 5.2% of its milk production last year, while it exported 21.6% of its milk production on a skim solids basis. This indicates that the U.S. skims off its butterfat for the domestic market, keeping it as a small player in global butterfat trade. 

While tariffs and trade have been making all the headlines, a new development has occurred in dairy markets. U.S. butter is trading $1 per pound lower than the two other major exporters, the EU and New Zealand. 

One more reason for optimism involves recent traction on whole milk. In April, the Senate Ag Committee overwhelmingly endorsed a plan to return whole milk back to school meal programs. Earlier this year, the House Ag Committee approved a similar measure. Should this measure become law, more butterfat could move through fluid milk channels as children, ages 2 to 11, drink twice the amount of milk than adults. What’s more, 35% of that milk for young children is consumed at school, according to USDA data. To be realistic, whole milk composition is standardized to 3.25% and milkfat levels in the national milk supply were 4.23% last year. 

Long-term, there are more reasons to be bullish, rather than bearish, on butterfat. To be fair, manufacturing, marketing, and distribution channels need to continue to adapt to the fast-paced change taking place in the U.S. milk supply.

Editor: Chris Laughton

Contributors: Corey A. Geiger, CoBank, Lead Economist, Dairy & Abbigail C. Prins, Cobank, Industry Analyst

View previous editions of the KEP

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Tags: dairy, ag economy, outlook, export