Early this year, most market signals indicated that dairy could have a bright 2025. After all, dairy continued to be a growth category with domestic retail sales climbing $2 billion over the past year to $78 billion, according to Circana. Restaurant sales climbed from $93.7 billion in March 2024 to $97.6 billion by November 2024. For exports, international cheese shipments grew 17% and reached a record 1.13 billion pounds last year. Dairy product exports posted $8.2 billion in sales, standing second only to the $9.5 billion all-time high in 2022.
However, headwinds have begun to blow on domestic dairy demand. Restaurant sales slid from $97.0 billion in December to $95.5 billion by February 2025, according to the U.S. Census Bureau and the National Restaurant Association. Earlier projections for strong export sales began to tarnish as tariff talk made importers jittery. As this was taking place, U.S. dairy farmers churned out record milk components driven by incentives in milk checks.
This market uncertainty sent futures contracts tumbling. From early January to early April, April-to-June Class III futures fell by $2.57/cwt. to a $16.86 average (Exhibit 1). Class IV dropped even further, losing $2.73 over 100 days to reach a $17.77 average for the contract bundle. While not as dramatic, July-to-December Class III fell $1.07 cents during the same trading window to settle at $17.86/cwt. on the CME. Meanwhile, Class IV butter-powder futures for the final six months of this year dropped by $1.99 to settle at a $18.51/cwt. average as concerns about dairy product exports continued to mount.
Despite this market downturn, dairy continues to have some bright spots. For starters, feed prices, paced by corn, soybeans, and alfalfa hay, all trended lower compared to just one year ago. Also, most U.S. dairy product and ingredient prices are lower than the EU and New Zealand, which could spur exports. In addition, dairy replacement numbers remained at a 20-year low and that will keep milk production in check over the next couple of years.
For the second straight year, dairy farmers bought a record 7.9 million units of beef semen to use on dairy heifers and cows to capitalize on record beef prices. However, to shore up the dearth of dairy replacements, U.S. dairy farmers bumped up purchases of gender-sorted semen from 8.4 million units in 2023 to 9.4 million units in 2024, according to sales data from the National Association of Animal Breeders. That means more dairy replacements are in the pipeline but that delivery to the milking string is still three years away due to biological cycles (Exhibit 2).
Near term, it’s a buyers’ market on cream, with butter churns running at capacity. That historic cream delivery has become possible due to epic growth in dairy components. Butterfat levels have vaulted from 3.70% to 4.40% over the past 20 years (Exhibit 3). Meanwhile, protein climbed from 3.06% to 3.40%. While some market analysts are concerned about overabundant butterfat supplies, processors and marketers must keep in mind the butterfat boom continues as the U.S. imported a record 172.6 million pounds of butter and anhydrous milk fat last year, according to USDA Foreign Agricultural Service data. That’s up from 10 million pounds in 2010 (Exhibit 4). Additionally, more abundant and lower-priced cream supplies may spur ice cream makers to add more cream to their ice cream.
