Revenue diversification has been a game changer on U.S. dairy farms. The pivot to using beef semen on a portion of the dairy cow herd has created a more robust income stream and bolstered dairy farms’ bottom lines. Just one year ago, day-old, beef-on-dairy calves were bringing $600 to $800 per head at U.S. auction markets. That number has leapt to a $1,000 to $1,200 range, with some auctions even reporting a $1,500 top-side number.
Unlike some other alternative revenue sources on dairy farms, every dairy farmer has the option to enhance revenue with beef-on-dairy. The combined cull cow and calf sale category netted about $1 per hundredweight (cwt.) on a typical dairy farm in 2021. Fast forward four years and the financial contribution has grown exponentially. Cull cow sales alone moved to a $1.50 per cwt. contribution with calf sales jumping to $2.50 per cwt. for a net gain of over $4 per hundredweight by the summer of 2025.
The beef-on-dairy market opportunity shows no signs of slowing over the next three years with a potential longer run as the U.S. beef cow herd is the smallest since 1961. As a result, numbers of steers and heifers destined for feedlots remain incredibly low, sending cattle futures to record highs. These new margins for beef in turn have caused the U.S. dairy cow herd to balloon to 9.52 million head, the highest total in over 30 years.
While milk production margins had been somewhat favorable, strong output in recent months significantly changed the price forecasts. Rather flat milk production in both 2023 and 2024 helped to keep milk markets in balance (Exhibit 1). Milk production began to rebound, growing 1.7% in the first eight months this year. While milk production is important, milk components have become a major market force. In 2023 and 2024, protein and butterfat production from U.S. dairy farms grew less than 2%. However, this year components have moved sharply higher with protein improving by 3.5% and butterfat jumping 4.1%. In the past three months, butterfat production has accelerated to over 5% growth year-over-year.
While appetite for protein seems insatiable, with the past year’s sales volume growth at 10% for yogurt and 14% for cottage cheese, the U.S. is simply making too much butterfat. Even though domestic butter sales have grown 4.5% and butterfat exports are a whopping 253% higher than last year, butter churns are running near capacity. Butter buyers believe that there will be ample supplies for the upcoming holiday season.
All of this butterfat caused spot butter prices to tumble nearly 80 cents since Aug. 1 trading to settle near $1.65 per pound at time when butter prices would typically be at a seasonal high. As a result, Class III and Class IV milk futures moved lower during the past two months (Exhibit 2 and Exhibit 3). Lower butter prices are largely responsible for the downward pressure on Class IV. Meanwhile, Class III has turned sluggish due to slower foot traffic at many quick service restaurant chains, and that’s a concern as half of all cheese is consumed away from home.
Due to these market conditions, the dairy margin outlook has shrunk considerably in the past months (Exhibit 4). In a traditional dairy environment, these market signals would tell dairy farmers to turn off the growth spigot. However, the lowest feed prices in over five years and record values for beef have changed everything, which means strong production from the nation’s dairy farms could continue. Should beef prices fall, everything changes in this narrative.
