Weaker Milk Supply Drives Class III Milk Price to 27-Month High | Dairy Herd

As the days get shorter and the weather cools, harvest is in full swing for dairy farmers around the country. As another crop year comes to a close, farmers are likely rejoicing at recent milk checks though the September Class III milk price settled at $23.34 per hundredweight, the highest in more than two years, since June 2022. Stronger milk prices coupled with lower feed costs support margins, with profits especially welcome after more than one year of struggling profitability.

A weaker milk supply has finally resulted in price strength in certain dairy products. US milk output has been lower than the prior year for 14 consecutive months now, a rare period of weakness for the US industry. On a global level, trends have also been similar, with milk output struggling in the EU and New Zealand. While components are impressive and continue to grow, less milk is causing some concern and pushing prices higher.

Weak Year-Over-Year Comparable

Critically, it will be difficult for farmers to quickly drive milk output higher, possibly keeping margins higher for longer than typically noted. Usually, farmers would add cows and drive yield higher as fast as possible to capitalize on improved profitability. However, replacement heifers are in short supply, and even if available, are at or close to record-high prices. It is not affordably possible to add cows to the herd to quickly increase milk output. Instead, farmers are likely to keep older, sometimes lower-producing cows in the herd for longer, meaning milk per cow is struggling to improve. Milk production will likely creep higher versus the prior year in the coming months, but it will be largely driven by weak prior year comparable datapoints rather than substantial strength in overall volume.

Product production remains mixed among commodities. Milk continues to flow to cheese vats and butter churns, but driers are still operating at lower than normal levels. High butter prices have kept butter production up year-over-year each month so far in 2024. Total cheese production has been mostly higher as well, but Mozzarella is driving that trend at the expense of Cheddar. Combined nonfat dry milk and skim milk powder production has been down more 10% year-over-year during each month since January as there is no need for balancing plants to run full when milk is short, coupled with still uncertain demand needs from global powder buyers.

Looking ahead, the Class III CME futures forward curve does not look as rosy into 2025, slipping back below $20 per hundredweight into Q1 2025. However, with the Class IV price outlook still holding at higher levels, coupled with the lowest feed costs in four years, margins should remain profitable. It is likely that a several month period of farmer profitability is materializing, welcome relief after the financial difficulties noted in 2023 and the first half of 2024.

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