Milk production continues to expand as the latest USDA report showed U.S. milk output up 1.7% from a year ago. The national dairy herd has grown by more than 167,000 head over the past year and now stands at its largest size in nearly three decades. Meanwhile, milk production per cow has remained relatively flat, highlighting that herd expansion is fueling increased milk supplies. This additional milk is largely going towards butter and cheese production, at a time where both dairy products are already well supplied. While strong export demand has helped absorb some of the additional output, continued growth in milk production could keep pressure on milk prices in the months ahead.
In AgWest’s territory, dairy production trends were mixed. After three years of contraction, Washington's dairy herd appears to be stabilizing. August 2026 inventories were down 5,000 cows year over year, a substantial improvement from the 29,000-head reduction recorded a year earlier. In contrast, Idaho and Arizona posted modest milk production gains of just over 1%, supported by larger herds. Oregon recorded the strongest growth in the region, with milk production increasing 7.8% year over year, driven by a gain of 10,000 more dairy cows over the past year. For the entire AgWest region, expanding cow numbers continue to offset generally flat milk production per cow, supporting additional milk supplies and further growth in dairy product manufacturing.
Cheese markets remain under pressure. U.S. cheese production and cold storage inventories are running 2.4% and 2.3% above year-ago levels, respectively, as weaker domestic demand and slowing restaurant traffic have limited consumption growth. Record cheese exports have not been sufficient to absorb growing supplies. Cheddar block prices have fallen to six-year lows, weighing heavily on Class III milk prices. Adding to concerns, both cheese and butter inventories typically begin to decline ahead of the holiday season as demand strengthens, but stocks remain elevated this year, signaling that supply continues to outpace demand.
The disconnect in dairy markets can largely be traced to the ongoing consumer focus on protein. Whey, a byproduct of cheese manufacturing, has been one of the biggest beneficiaries of the protein boom, with demand from sports nutrition and high-protein food products pushing dry whey prices to their highest levels in four years. U.S. whey production is up 8% year over year, exports have reached record levels, and strong whey values have encouraged cheese plants to maintain aggressive production schedules. While cheese is also high in protein, it has not benefited from the same consumer perception, causing cheese production to expand faster than demand. Even with U.S. cheese exports running 7% above year-ago levels, export growth has not been sufficient to absorb growing supplies. The contribution from whey prices has not been large enough to overcome the sharp decline in cheese prices. Until cheese demand improves or inventories begin to tighten, Class III milk prices are likely to remain constrained despite the strength in protein markets.
Class IV milk prices have been more resilient. Robust demand for milk powders has helped lift nonfat dry milk prices above $2.10 per pound, offsetting weakness in butter prices and providing significant support to the Class IV formula. The sustainability of this strength will depend on export demand, particularly as U.S. milk powder prices trade at a premium to competing suppliers.
Profitability
Dairy: Slightly profitable - Neutral 12-month outlook
Despite persistent pressure from low milk prices and elevated production costs, many dairy producers have maintained slight profitability due to strong supplemental income from cattle sales. As calf values retreat and feed costs rise, that profitability buffer is shrinking, creating a more challenging outlook.
