USDA’s October milk production report revealed the first monthly decline in the U.S. dairy cow inventory for 2025. The national herd contracted by 6,000 head from September to October, bringing the total to 9.58 million cows. Despite this dip, the herd remains over 200,000 head larger than a year ago, reflecting earlier expansion trends. This reduction aligns with historically tight replacement heifer inventories, which have fallen to a record low of 2.922 million head, with a heifer-to-cow ratio of 41.9, the lowest since 1991.
Class IV milk prices have dropped sharply throughout 2025, falling over $6 per cwt to $14.30 in October, down from earlier highs. Class III prices have also softened, averaging $16.91 per cwt in October, though their decline has been less severe. These price drops have pressured producer margins and future stability could be threatened by herd expansion or weakening consumer demand.
Despite the smaller herd, October milk production rose 3.7% year over year to 19.5 billion pounds, driven by a 1.5% increase in productivity per cow and higher milk component levels. California, Idaho, and Kansas led production gains, while Washington and New Mexico saw declines.
Butter production surged over the summer, with August output up 8% year over year, supported by new processing capacity in the Pacific Northwest and California. This expansion has weighed on prices, with butter prices below $2 per pound for the first time since early 2024. Competitive pricing and abundant supply have positioned the U.S. as a leading butter exporter. Butter exports are up more than 130% over the past 12 months, reaching 10-year export highs. This is largely attributed to butter prices being more than $0.75 and $1.00 lower than New Zealand and European exports, respectively.
Cheese production has grown more modestly, with August output up less than 1% year over year. However, prices have softened significantly. Spot prices for cheese barrels dropped $0.31 from late October to late November, averaging $1.49 per pound in the last week of November. Cheese block and barrel prices have declined 20–30% from last year, fueling record export demand. Year-to-date cheese exports are up 14.1% and are set to surpass the record 1.12 billion exported pounds in 2024.
While producer margins have been supported by lower feed costs and supplemental income from beef-on-dairy sales, risks remain. Cooperative assessments in states like Washington and California are adding financial strain. If milk prices continue to weaken or consumer demand softens, profitability could erode further. Strong holiday demand for butter and cheese may provide short-term price support, but structural oversupply in butterfat markets suggests continued volatility heading into early 2026.
Profitability
Dairy: Breakeven profitability - Bearish 12-month outlook
Milk prices remain weak, and while lower feed costs and beef-dairy income offer support, margins are likely to tighten over the next year, increasing the risk of losses if prices or demand soften further.
