The U.S. dairy herd has grown to its largest size since the 1990s, adding approximately 258,000 cows since the current expansion began nearly two years ago. However, the pace of herd growth has slowed over the past four months, signaling that expansion is beginning to level off. As a result, production growth is expected to normalize in 2026.
U.S. milk production remains high, increasing 2.6% in 2025. January milk production is up 3.4% from a year earlier, supported by both higher per cow productivity, up 24 pounds from January 2025, and an additional 200,000 head compared to the previous year. The Western U.S. posted modest gains, though performance differed by state. Among AgWest states, Arizona, California, Idaho, and Oregon reported year-over-year production increases of 0.5%, 4.7%, 3.2% and 4.9%, respectively. Washington remained an outlier, with milk production declining 6.1%. This was largely driven by a 17,000 head herd reduction as producers responded to narrowing margins and rising costs.
Dairy cow slaughter rates remain near the five-year average, supported by strong beef demand. Elevated beef prices continue to bolster dairy economics, with day-old dairy beef cross calves averaging more than $1,500 per head, helping to offset higher production costs and marginal milk prices.
Exports, government purchases and cold storage support milk prices.
Milk prices are near breakeven levels, generally constrained by strong milk supplies. However, milk prices have some upside potential in the current environment, supported by robust export demand, increased USDA purchases and tightening cold storage supplies.
Overall, dairy markets are showing renewed strength and optimism heading into the spring.
U.S. dairy exports rose 4% in 2025, led by significant gains in butter and cheese. Butter exports surged 162% year over year, reaching record volumes in November and December, with strong shipments continuing into early 2026. Cheese exports also posted solid growth, increasing 20% over the same period.
Additional support came from USDA’s announcement of $148 million in Section 32 dairy product purchases. These purchases are expected to increase total U.S. dairy utilization by just over 1% and include $75 million for butter, $32.5 million for cheddar and related cheeses, and smaller allocations for Swiss cheese, fresh fluid milk, and ultrahigh temperature milk.
Cold storage data highlights the tightness in butter supplies. From December to January, butter inventories increased by just 28 million pounds, well below the typical seasonal buildup of about 40 million pounds. Even after the post-holiday period, butter stocks remained historically low through February, helping push butter futures above $2.00 per pound.
U.S. butter is currently the lowest priced among major global exporters, enhancing export competitiveness and suggesting additional upside potential. These dynamics have translated into a strong rally in Class IV markets, with February futures gaining $4 to $5 per cwt and pushing future prices above $19 per cwt. Tight supplies, strong exports, and competitive U.S. pricing continue to provide bullish support for Class IV markets.
Cheese markets, while supported by broader dairy strength, present a more balanced outlook. Spot cheese prices above $1.80 per pound could begin to pressure U.S. export competitiveness, particularly as European Union cheese exports expanded by 20% in 2025. Still, rising butter and nonfat dry milk prices may continue to lend indirect support to cheese values. Futures markets reflect cautious optimism, with spring Class III contracts trading near or above $17 per cwt and much of the forward curve holding in the $18 range.
Profitability
Dairy: Breakeven profitability - Neutral 12-month outlook
Slowing herd expansion and steady demand are balancing dairy markets, while elevated costs and ample milk supplies continue to limit upside. The neutral outlook favors disciplined cost management and cautious growth rather than expansion.
