Guest Columns

Perspective:
Dairy Markets

The outlook for 2025

Mike McCully

Mike McCully is owner of McCully Consulting, South Bend, Indiana, and contributes this column for Cheese Market News®.

I probably speak for most people in saying I’m happy to be done with election fatigue and a seemingly endless barrage of daily text messages and emails. The results will have important implications on regulations, taxes, trade, immigration, the next farm bill and much more. While Republicans took back control of the presidency and Senate, the House results are undecided as of this writing. If there is a divided Congress, either compromise — not the first word you think of in Washington lately — will have to be reached, or legislative gridlock will ensue. With a Republican Senate, President-elect Trump will have an easier time getting his nominees confirmed. Unlike in 2016, news reports note the transition teams are prepared on day 1. Time will tell how that plays out.

While a number of macro factors will impact markets in 2025, there is also plenty of uncertainty in dairy markets. CME prices for cheese and butter have tumbled lower in the last two months while milk powders and whey proteins are supported by good demand. There continues to be many questions about the potential impacts from new plants and expansions happening around the country, not only cheese and whey, but also extended-shelf-life (ESL) and aseptic beverages. Over the long term, the future for dairy remains bright along with the ability for the U.S. dairy industry to supply growing global demand for dairy products. Don’t lose sight of the fact that a lot of companies are making large investments to capitalize on that opportunity. These new plants are changing supply and demand dynamics to where, for the first time in many years, plants will be chasing milk instead of milk chasing plants.

How will dairy markets evolve in 2025? It starts with milk. In the U.S., dairy farmer margins, on paper, are the best they’ve been in 10 years, and the outlook is for another solid year of profits. In past times, that would have resulted in above-average milk growth. But the challenges to expansion are well known: replacement heifers are expensive and hard to find, the cost to build a new barn has risen considerably and higher interest rates and labor costs are also headwinds along with the uncertainty of HPAI (bird flu) in California. Importantly, milk solids production is outpacing milk volume growth as farmers respond to the incentive to produce more butterfat and protein.

Outside the U.S., the milk production season is off to a good start in Oceania, but weather over the next few months will determine how the balance of the season will progress. With profitable milk prices, modest growth is expected as long as the weather cooperates. The outlook for Europe is more uncertain as milk growth slipped back into negative territory in recent months. As in other regions, milk prices have risen significantly, but weather challenges and the impacts of Bluetongue disease will be felt into the winter.

CME cheese prices are back to where they were this spring and early summer — in a range between $1.80 and $2. Cheese market fundamentals are supportive to prices remaining in this range. The gap to last year in cheese stocks is the largest since July 2014. Production in September was unchanged versus last year, although new plants and expansions are expected to push production up in 2025. Exports have been above year-ago levels, and with U.S. prices trading at a discount to Europe and Oceania, there is the potential for continued strength in Q1. One question surrounds domestic demand, which has been OK, but not great. The growth in diet drugs, specifically GLP-1 (e.g. Ozempic) has mixed impacts on dairy. Some guidance points to decreasing consumption of high-fat foods including cheese, ice cream, butter and cream products. It will be hard to precisely define how it will impact cheese demand, but it likely is not positive.

On the flip side, demand for high-protein dairy and whey products is booming globally. Prices for whey proteins have been firm to higher on tight supplies and increased sales of high-protein foods. The investment wave in cheese plants will put more whey proteins into the market in 2025. Prices are forecast to soften, but if demand remains resilient, the downside to prices is limited.

The CME butter market has thrown a curveball in the last one to two months. After spending months over $3, making people think a new equilibrium was being established, the fundamentals caught up to the butter market, resulting in prices plummeting $0.50 per pound going into the peak holiday demand period. Can prices hold in the $2.60-$2.70s after holiday sales wrap up? Or is $2.50 or $2.25 possible? There is a lot of cream and butter around, so the outlook leans to the downside into Q1. From there, the question will be how much milk is growing and how much milk will new plants take from butter production. In the absence of fear about running out of butter next fall, prices could settle into the mid-$2s instead of the upper-$2s.

Milk powders have a more bullish outlook than butter given a recovery in global demand and tight supplies in some regions. Mexico is a wild card as its demand is key to the U.S. market, and with lower domestic milk production, Mexico’s appetite for imports is increasing. There are varying opinions about where nonfat dry milk prices go from here. Some point to increased exports to Mexico and other countries that could push prices to $1.50, while others are less optimistic and think prices could stall out in the $1.20-$1.30s.

Finally, a less reported segment of the new plant investments is the expansion in ESL and aseptic processing capacity. The growth in specialty milk products over the last decade or more has put strain on the capacity to make them. The new plants will help alleviate the bottlenecks and potentially allow for additional growth of milk and dairy beverages.

While the dairy industry and country remain on an upward trajectory, there are always opportunities and challenges along the way. The industry is consolidating, and the pace is expected to quicken in the next few years as pressure is put on both farms and processors. The amount of investment is unprecedented and a strong sign for future dairy growth.

CMN

The views expressed by CMN’s guest columnists are their own opinions and do not necessarily reflect those of Cheese Market News®.

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