Dairy growth continues, but markets show signs of softening

The U.S. dairy sector continues to expand as producers add cows and increase milk production. Recent USDA cattle inventory and milk production underscore this trend. As of July 1, the U.S. dairy herd totaled 9.65 million head, up 2.1% from a year ago and nearing 30-year highs. The number of replacement heifers also increased to 3.6 million head, compared to 3.5 million head last year, indicating continued herd expansion ahead.

Across AgWest states, Arizona, Idaho, California, and Oregon all posted year-over-year growth in dairy cow numbers. Washington's dairy herd appears to be stabilizing, with losses limited to 2,000 head compared to a year ago. The state has reduced its dairy herd by approximately 20,000 head over the past 18 months.

Milk production growth is being driven by both larger herds and improvements in productivity. In the major dairy-producing states, June milk production reached 18.9 billion pounds, up 2.4% from last year, while milk production per cow increased by 7 pounds year over year. California was a notable exception, as June's extreme heat limited productivity gains and kept milk yields relatively flat compared to last year. Continued growth in milk supplies could pressure milk prices if production outpaces demand growth or if new processing capacity comes online more slowly than expected.

Despite a seasonal rebound in milk prices during the spring, dairy producers face increasing margin pressure as milk supplies continue to grow. The year began with an All-Milk price of $17.50 per cwt, resulting in Dairy Margin Coverage (DMC) payments for the first three months of 2026. Prices strengthened through May, peaking at $21.30 per cwt, before beginning to soften in June. July prices may again be low enough to trigger a DMC payment, signaling renewed pressure on producer profitability. Further price declines are expected during the second half of the year, which could continue to erode dairy margins.

Profitability

Dairy: Slightly profitable - Neutral 12-month outlook

Improving milk prices and relatively low feed costs, combined with added revenue from elevated beef values, support modest profitability.

Wednesday Midday Dairy Market Summary - Cheese Prices Remain Steady

OUTSIDE MARKETS SUMMARY:

CORN:	189 Higher
SOYBEANS:	12 Higher
SOYBEAN MEAL:	$2.20 Higher
LIVE CATTLE:	$2.57 Lower
DOW JONES:	42 Points Higher
NASDAQ:	171 Points higherr
CRUDE OIL:	$0.06 Lower

MIDDAY MARKET UPDATE:

The block and barrel cheese prices remained unchanged for the second consecutive day, with no loads traded. There were two uncovered offers for blocks remaining at the close of the spot trading period, with no buyers showing up in either category. The dry whey price remained unchanged at 69.75 with no loads traded. Class III futures are mixed, ranging from 8 cents lower to 12 cents higher. The butter price slipped 0.75 cent to close at $1.4625 with 39 loads traded. There were 10 unfilled bids and 40 uncovered offers remaining at the close of spot trading. Even though quite a few loads were traded, it did not diminish the volume of offers that were seen on Tuesday. Grade A nonfat dry milk jumped 5.00 cents to close at $1.6500 with one load traded. This is the highest price since June 30. Class IV futures are 18 cents lower to 48 cents higher. The lower price is in the August contract, which is mostly priced. If more trading activity takes place, futures should be significantly higher. Butter futures are 2.75 cents lower to 0.97 cent higher. Dry whey futures are 0.45 cent lower to 0.25 cent higher. Cheese futures are 0.40 cent lower to 0.70 cent higher. Nonfat dry milk futures are 0.10 -- 4.00 cents higher. USDA reduced its estimated milk output for 2027 to 238.0 billion pounds.

Wednesday Morning Dairy Market Update - Little Change in Fundamentals

OPENING CALLS:

Class III Milk Futures:	4 to 6 Higher
Class IV Milk Futures:	Mixed
Butter Futures:	Mixed

OUTSIDE MARKET OPENING CALLS:

Corn Futures:	4 to 5 Higher
Soybean Futures:	4 to 6 Higher
Soybean Meal Futures:	$2 to $3 Higher
Wheat Futures:	15 to 19 Higher

MILK:

There is no fundamental news to move the market significantly. Milk production is strong and demand is good. So far, demand is keeping up with production, but the result has been steady prices at lower levels. The anticipation has been that seasonal buying would improve, resulting in higher prices, but so far that has not been the case. There has been no need for buyers to be aggressive as they see sufficient supplies and the potential for it to remain that way for a while. The USDA will release the World Agricultural Supply and Demand report Wednesday morning. The report will show USDA's estimate for milk production, milk prices, and dairy product prices. The report will not be a market-mover, but may indicate price potential.

CHEESE:

Steady prices on Tuesday and no interest from buyers or sellers did not indicate direction. Prices could move either way Wednesday depending on who needs to accomplish business. Buyers remain content to purchase supplies as needed and to build inventory when possible.

BUTTER:

Butter supplies are plentiful with sellers readily offering it on the spot market. Churning remains active, providing sufficient supply to demand. Buyers see no reason to be aggressive. They have been purchasing to fill immediate orders and to increase ownership for later demand.