The author is a dairy markets and public relations specialist at the University of Wisconsin-Madison.
The dairy market in 2024 is characterised by a delicate balance between supply and demand. While recent prices have provided some relief, the outlook remains uncertain. There are signs that lower prices and tighter margins may be ahead and it may take some time for the situation to recover.
Supply dynamics
Last year’s low milk prices and tight margins resulted in a reduced milk supply. While demand remained relatively constant, producers have reduced the number of cows and overall production.
The first half of this year saw a steady year-on-year decline in total milk production, leading to an increase in market prices since June. This gradual increase in the total milk price has provided some breathing room, and margins are likely to remain stable for the rest of 2024. Nevertheless, price pressures could emerge in the long term.
Processors are investing billions of dollars in new or expanded facilities. The key questions are what will happen when these additional products come to market and whether the milk supplying these facilities is sufficient.
Recently, cheese prices on the CME reached new highs before declining slightly. The National Dairy Products Sales Report (NDPSR) has indicated for much of 2024 that cheese buyers have been particularly price-sensitive. Cheddar cheese production fell 9% year-over-year in June. Given lower production, buyers’ price sensitivity, and new processing capacity, there is a strong argument that prices need to be reduced to prevent inventory buildup.
This time of year, we typically see an increase in fresh milk consumption, accompanied by a seasonally stronger Class III spot milk base in the Midwest. So far, the base has been trending positively, and if historical patterns hold, we could see an average Class III spot milk base of $1.50 to $2 per hundredweight (cwt.) above grade levels in the Midwest.
It would not be surprising to see cow numbers increase later this year and in early 2025. Farmers have been keeping their cows for longer, and we could expect to see planned increases in herds in late winter and spring. If this happens, price pressures are likely to increase.
One potential balancing factor is whether milk supply has already been allocated to new processing plants. To maintain healthy margins on the farm, these plants would need to source at least some milk from existing supplies. It is likely that milk supply will come from a mix of already planned production growth and milk from the existing market. The extent of this allocation will be a key factor in prices as this capacity comes online.
Considerations on demand
Demand is relatively stable, although there are underlying price pressures that could alter the outlook. Exports were recorded at competitive prices in 2024. The strengthening cheese market in the European Union (EU) could break this pattern for the US.
Domestically, consumer sales and special offers have boosted purchases, but U.S. consumers are increasingly price-conscious. Eating out of the home has increased in recent years, benefiting dairy products, particularly cheese. However, any reduction in food spending or a shift toward cheaper staples on supermarket shelves, coupled with increased dairy production capacity, could put downward pressure on prices in the future.
Bullish and bearish factors
There is a compelling case that milk prices will remain strong through the end of 2024. Dairy Margin Coverage (DMC) currently estimates that margins will remain above $14 per hundredweight for the remainder of the year. Producers have been cautious in expanding cow herds and, given high beef prices and replacement costs, short-term supply responses are unlikely. Dairy products will continue to be sold in domestic and international markets, albeit at a modest pace. Continued strong EU cheese prices could help keep Class III prices above $20 per hundredweight. Barring significant disruption, milk prices above $20 per hundredweight and margins above $14 per hundredweight could become a reality for the remainder of the year.
On the other hand, medium to long-term conditions could undermine these trends. Higher cheese production, stock build-up and lower demand could create downward pressure. The market is already expecting the milk price to fall in six to nine months. New processing methods and increasing cow numbers will make it difficult for current demand to support existing prices. The next few months could be a good time for producers to think about longer-term planning.
