There’s milk everywhere: more milk in the U.S., Europe and New Zealand than a year ago, soft Class IV, and Class III futures that could slip into the $13s once you plug in today’s spot cheese and whey.
With a long milk wave crashing over the dairy industry, will farmers start culling cows and leaving stalls empty?
Inside the episode, the team churns through:
- Why strong balance sheets, paid-down debt and high cow values could delay a production pullback
- How lower feed costs shift the breakeven – but can’t fully offset falling milk checks
- Why Western and cheese-focused regions like the Pacific Northwest, California and Idaho may struggle first
- How WPC 80, WPI and clear whey proteins have become the lone bulls – and why capacity constraints limit the industry’s response
- Why there are limits to what customers can pay for whey, and where substitution is already happening
It’s a barn full of bears on butter, cheese and fluid milk, but the protein complex is still flexing. The question is how long that can last?
Tune in to The Milk Check episode 88: One bull in a barn full of bears to hear how our traders are navigating a market that’s bearish on volume but still bullish on protein.
Got questions?
We’d love to hear them. Submit below, and we might answer it on the show.
Podcast: Play in new window | Download (Duration: 23:23 — 8.0MB)
Subscribe: RSS
Ted Jacoby III:
Welcome, everybody, to The Milk Check.
It is December 5th. We’re gonna talk about markets today. And rather than boring you and having the same conversation we had three weeks ago, everything is still bearish. There’s milk everywhere. There’s milk all over the U.S.
There’s milk all over Europe. There’s milk all over New Zealand. There’s a whole bunch more milk this year than last year. Things are long. It’s very likely things are gonna get longer before they get shorter.
Today we have some of our usual suspects. My brother Gus has joined us today.
We’ve got Josh White, we’ve got Joe Maixner, we’ve got Diego Carvallo. And, of course, myself. Looking forward to a great conversation.
So, rather than discussing how bearish we can be on these markets, my question, and I’m gonna start by throwing this question at my brother, Gus, is Gus, how long do you think it’s gonna take for dairy farmers to start culling cows and for this milk [00:01:00] production to slow down?
Gus Jacoby:
I feel like milk price and farm economics are completely contingent on that and how bad those farm economics get with respect to the milk price. Class III is still relatively high. Obviously, Class IV is pretty poor right now. The way I see it, dairymen, at this moment in time, still have fairly strong balance sheets. So, the recent low prices haven’t affected ’em all that much. So, I don’t expect their behavior with respect to culling and whatnot to change. But I think in five, six months from now, assuming that the milk price is at or lower, and quite frankly, I think Class III probably does need to get a bit lower, you’ll start to see some of that behavior change. If I had to guess, either as early as early summer, but as late as maybe mid-fall, if farm economics don’t change, we’ll start to see dairymen begin to leave stalls open. I mean, they’re gonna cull a cow, collect that beef revenue that they can grab, and not necessarily buy the expensive heifer.
Ted Jacoby III:
You’re thinking it’s gonna take about six months for dairy farmers [00:02:00] to get to the point where they feel like they need to increase the amount of cows they’re selling in order to meet their cashflow needs?
Gus Jacoby:
That’s my best guess. And again, that can be either expedited or slowed down depending on where the milk price goes.
Ted Jacoby III:
Corn prices have really come down this year. Do you think the lower feed prices have lowered where that break even point is, or how low we need to go in milk price in order to really send those signals in a strong way?
Gus Jacoby:
Certainly, feed prices being lower are gonna be helpful to the farm economic model.
This becomes a milk price discussion. If the cheese price continues to have that downward pressure and gets low enough, those feed prices won’t be low enough. It’s always related to their inputs.
And certainly, cheap feed helps their cause to extend growth in the milk production model.
Ted Jacoby III:
Right now, on December 5th, the Class III prices for the first quarter are right around, let’s call it $15.50, but if you use today’s cheese price on the spot market at the CME in today’s whey price, you’re probably looking at something closer to $14, 14 and a quarter.
[00:03:00] Is that low enough or do we need to go lower?Gus Jacoby:
It’s low enough. But not low to expedite anything. Maybe that takes us into the late summer, and remember, it depends on where we’re talking here in the country.
Milk production costs are different depending on where you exist in the country. And also payouts are a lot different in a lot of places, depending on where you exist in the country. So, some regions might struggle sooner than later.
Ted Jacoby III:
Which regions do you think are gonna struggle first?
Gus Jacoby: The West, Pacific Northwest, I think California, areas like Idaho that are strongly cheese based. If you’re paying on a Class III price and it stabilizes, which I don’t anticipate here, then perhaps some of those regions might hold on longer. My guess is predicated on the forecast of Class III going a bit lower.
Ted Jacoby III:
I guess I’d have to agree with that ’cause I don’t think $14 a hundredweight is enough. Because we’re still in front of Christmas, and I think the market’s probably gonna get worse before it gets better. My hunch is we’re gonna see $13 milk this year. We’re gonna see it in Class IV, and we may be already [00:04:00] seeing it in Class IV as soon as December.
I think we’re gonna see a 13 handle in Class III, probably most of the first quarter.
Gus Jacoby:
If you’ve got a Class III at 13, and Class IV holds as low as it is, which I would expect certainly in the first half of the year, and then you have your standard freight and other deducts in those milk checks, dairymen are now getting to an area that is very adverse.
Ted Jacoby III:
Even though we’re talking about really low prices, I think there’s a lot of dairy farmers out there that are in a pretty healthy place.
Gus Jacoby:
I would agree.
Ted Jacoby III:
They’re healthy in two ways. One, I think that many of them have been able to take the last two years and really pay down their debt.
And so, they’re in a really good spot financially, just on the balance sheet alone. But the second thing is those cows, they’re worth twice what they were worth three years ago. And so, not only have they paid down their debt, but if they need to borrow more, they’ve got more collateral to borrow against because those cows are usually the collateral for the banks when the banks lend dairy farmers money.
It’s [00:05:00] usually the cows and the land. My hunch is that this may go on longer than we expect because of how healthy dairy farmers are financially today. Not saying they’ll be healthy in four or five months, but they’re healthy today. And because of how much bankers are probably willing to lend them based on those balance sheets.
Gus Jacoby:
I agree that the balance sheets are strong at the moment, even after a couple tough months. But I would also add, that that can change fairly quickly if the milk price gets low enough. And it’s certainly a ratio of farm economics over a certain period of time and milk price.
If it gets low enough and makes those farm economics adverse enough, it can expedite the issue, which is a plausible scenario right now.
Ted Jacoby III:
Mm-hmm. I would agree with that. I think the hardest thing, especially when you have a falling market like we do right now, is to try and figure out exactly where the bottom is.
About a month ago, the bottom was about a $1.40. Well, guess what? Cheese price is already below a $1.40 Now, we’re hearing it’s gonna be [00:06:00] somewhere in the $1.20s. What I’m scared is we’re gonna get to the $1.20s, and somebody’s gonna start talking about maybe we need to go into the teens.
I don’t know if we’re gonna go that low, but we’re definitely in that scenario right now, where you have a market that’s falling and nobody has a really good feel for where that bottom is.
Gus Jacoby:
I agree. Cheese and butter right now, their outlook over the next six to eight months does not look good.
Ted Jacoby III:
Yeah.
You mentioned butter. Joe, I’ll ask you: we’re below a $1.50 in butter. Butter feels like maybe it’s caught a temporary floor. Is this a temporary floor or could we stabilize here for the next six months?
Joe Maixner:
I think we’ve hit a temporary floor, but I don’t think it’s the lowest we’ll see over the next 90 days. I think that cream seems to be in balance, even after Thanksgiving, and I think it’s kept a nice spot in the market where people are willing to buy, those that hadn’t already put contracts on for next year are seeing the 2026 numbers and they’re looking at that against their budgets and blocking volume up for next year. A [00:07:00] lot of first half volume’s already been booked. We’re just seeing more activity.
We’ve hit that level of support.
Ted Jacoby III:
Joe, you mentioned cream. Gus, I’m gonna go back to you. We had some really ugly cream multiples the first half of last year. Have we increased churn capacity, and do we expect those multiples to be just as bad this year or have we increased churn capacity enough so that maybe they won’t quite get so bad?
Gus Jacoby:
We have increased churn capacity, certainly. I don’t know if it’s enough. Some dairymen around the country are feeding their rations a bit different and getting a little bit less butterfat out of the milk. I don’t think that’s enough, yet, to make too much change.
I will anticipate having some very low multiples through the holidays and the spring flush.
Ted Jacoby III:
Okay.
Diego, I’m gonna switch gears and come to you. We just talked about U.S. milk production. Gus thinks it’ll take about six months to turn. I hate to be really pessimistic, but my gut, and I just can’t shake this gut, is it’s gonna take longer than usual this time around.
And we may see it go well past nine months before we see a real turn. [00:08:00] We may see the number get better simply because we’re measuring against strength, but that doesn’t mean we actually see a change in trend. What about Europe and some of the other milking regions in the world, is it gonna take that long us to see some changes in milk production in those regions?
Diego Carvallo:
If you just go to the fundamentals and you analyze that the European farmer usually has a smaller scale, and that means that their costs tend to be a little bit on the higher end.
They do not have access to capital as there is in the U.S. There’s more restrictions when it comes to environmental, and overall I would say they have more headwinds than the U.S. So, if you add to all of those headwinds, the price headwind, the reaction on milk production to lower prices should be faster than in the U.S. The same applies to South America. But we’ve talked a lot about Chinese production, we know that in that country, there are way more things to take into account.
Ted Jacoby III:
[00:09:00] So, we’ve been talking a lot about the supply side today. We’re just overwhelming supply on the butter side; we’re overwhelming demand to a lesser extent, but still on the cheese side. Josh, protein still tends to be the shining star. But are we getting to a point where we’re starting to get some pushback on protein prices?And is that going to continue to be the lone bull in an overall bearish dairy market, or do we need to be concerned there too?
Josh White:
I don’t think we’re getting pushback at the prices quite yet. Does that mean I think that these prices are palatable over the long term?
I’m unsure. But what we are seeing right now is lack of availability and no quick ability by the European market or the U.S. market to scale production to meet the demand, which means that ultimately, the demand for WPC 80 and WPI and then some of the more value-added proteins, particularly in the whey complex, like the clear WPIs, the acidified products and others, the demand is outpacing our ability to supply it. What that’s [00:10:00] doing is forcing utilization segments or customers that can’t compete in terms of price for that available supply to look to alternatives. We’re starting to see more and more of that. As a commodity trader, we expect that to happen quicker than it does.
So, already in early 2025, we were looking towards MPCs, casein-related products and others to pick up some of that demand because they’re much lower value. And I don’t think that the average customer in the market that’s using whey proteins fully recognize the functional differences between whey proteins and milk proteins.
And they certainly don’t realize that milk protein concentrate has whey protein in it. Generally speaking, the average consumer doesn’t know the difference in these products. That’s not a fault of theirs. Particularly going into CPG applications and further processing, this is an ingredient.
An ingredient that has a lot of label recognition and popularity right now for all the reasons we’ve talked about in prior podcasts: GLP-1 driven demand, [00:11:00] health and wellness movements globally, a lot of other reasons. Is that an early indication that enough time has now passed that the relative value of whey protein above the competing, but still quite valuable proteins in the dairy complex, are gonna result in substitution both substitution within the dairy category to whey protein to milk protein concentrates to micellar casein to WPC 70, also known as WPPC, whey protein phospholipid concentrate (WPPC) ProCream. There’s a lot of different names for these products.
That’s likely to happen.
But it also, unfortunately, might result in a lot of categories pushing to non-dairy proteins. There’s a lot of information out there, things put on by ADPI and others talking about the protein power of dairy and how digestible it is. How high quality it is for your conversion rate, why it’s such a popular thing.
But if you can’t get supply, you’re forced to look to alternatives. And so, we’re starting to see some of that [00:12:00] happen. So, a couple things that I’ve heard anecdotally in the market over the past few weeks in particular, but it’s been happening over the last few months are: get us samples of milk protein concentrate.
One of our customers is suspending a certain SKU on the shelf because they can’t get the supply. This price simply won’t work for our application. So, we won’t buy this product at above this price. So, we are triggering some thresholds. And triggering thresholds is gonna have some type of balancing result in the industry.
Whether that’s enough to support the milk protein side of the equation, I don’t know. We have a limit to the ability to respond to this demand. You have to order equipment, you have to get the bank lending, you’ve gotta get the design. It takes a long time to increase capacity.
That’s all gonna come into play and impact this market and the balance of this market in 2026. Now, if you’re asking me, is my gut that we hold these high prices or even higher prices without some reversal in the price [00:13:00] action for whey proteins in 2026? I’m not ready to say that it’s just here or higher in 26, but is it here or higher in the first quarter?
Absolutely. Is it here higher in the second quarter, probably. Is it here or higher after that? I become a little bit skeptical. And to be clear, that’s not because the demand isn’t there right now. The demand feels like it’s there. I just don’t know how the market balances it out without pushing the price just too high in the short term for the market to digest it and pass it through.
I also think that when you’re talking about the dairymen and you’re talking about the cheese makers, there is two different classes here. There is the class of those that make whey proteins and the class of those that do not. That has a material impact on profitability throughout the supply chain.
Additionally, we’ve got a lot of milk in the U.S. We’ve got a lot of milk in the world right now, and the milk in the Northern hemisphere altogether is only gonna increase from here through the first half of [00:14:00] the year. That milk is gonna need to be processed.
The incremental milk production will result in incremental whey protein availability, which means that those whey solids from cheese processors they have to find a market. If you can’t make the valuable product of WPC 80 and WPI, you have to explore the other alternatives, which are simply not experiencing the robust demand of those two categories. Sweet whey powder, whey protein concentrate 34% (WPC 34) and some of these other products, they have a limit to what people are willing to pay.
History tells us, at least for sweet whey powder, we’re testing those limits.
Ted Jacoby III:
For sweet whey powder, we are, the question is, is this happening for whey protein? And that’s a harder one to answer.
Josh White:
Absolutely.
Ted Jacoby III:
I did some back of the envelope math.
As a country, we produce 8% to 9% more milk in May on a daily basis than we do in November. If half of that milk goes into cheese, we’ll produce 8% more cheese and 8% perhaps more whey protein. The solids change, too. So, maybe it’s not a full [00:15:00] 8%, but is 8% enough to tip the scale on whey protein demand?
And I don’t know, given the demand complex for whey, I think for cheese it’s gonna feel very burdensome. I think for butter, it would probably feel pretty burdensome. The butter market we’re kind of used to it because of the way the demand curve looks, but I just don’t know when it comes to whey, if that’s enough to put some pressure on this market and bring those prices down.
Josh White:
Well, it depends on what you’re talking about because you could argue that the WPC and WPI facilities are bringing in outside whey solids. Mm-hmm. Mm-hmm. As their own milk and their own whey generation increases seasonally, that’s gonna push whey solids back to somebody else. So, all 8% in your hypothesis there, I doubt contributes to an 8% increase in whey protein production.
Because the available capacity isn’t there?
Josh White:
Correct. Now, is there production efficiencies that are still gonna be gained? Are there those out there that are expanding a bit [00:16:00] that we’re unaware of?
Are there orders for new equipment in the system that might be closer to realization than we think? All possible. And we can’t ignore Europe. I don’t feel like I can adequately represent what the expansion model looks like in Europe right now for whey proteins.
What I can say is that at least for the U.S. and Europe, our internal demand is currently absorbing a greater percentage of our production than ever before, and that’s leaving the rest of the world that was buying product from those two markets, having to search for that protein elsewhere.
Ted Jacoby III:
Mm-hmm.
Josh White:
And, this is being a bit over generic, but the rest of the world likely will be more willing to substitute than the U.S. or the European consumer to other products.
Ted Jacoby III:
I would agree with that. Everybody in our office is just leaning really bearish, just about everybody we talk to seems to be leaning really bearish.
Josh White:
Outside of Black Swan events: major trade disruptions, major production impacts that we can’t predict. If you’ve [00:17:00] been in the dairy industry long enough, you know to never bet against the dairymen and their ability to make milk.
But it’s gotta be on the radar that the competitive dollars for those animals I don’t think has ever been as lucrative as it is right now.
And those animals that they’re currently milking are older then typically they want them to be. So, if we shift this cycle quickly enough and violently enough, and that’s price, at what moment do we get surprised at what that residual response is?
How many pent up animals find their way to slaughter? How quickly that could happen. And I think generally speaking, most of us would bet that the calf inside the dairy cow right now is worth enough to wait. And so, we’ve gotta get through the first half of the Northern Hemisphere season before we see much of an animal response.
Ted Jacoby III:
I think that’s a fair comment. Dairy farmers, especially the big financially astute ones, there’s a math equation. It’s like, this is my revenue [00:18:00] from milk.
This is my maybe revenue from biofuels or wherever else. They have revenue streams from a cow that’s giving milk every day. This is the cost to maintain that cow. The variable cost feed, for example, being the big one. Well, when you’re getting $20, a hundredweight from your milk versus $13, a hundredweight for your milk.
That equation has changed quite a bit, whereas the exit price, what you’re gonna get if you sell the cow hasn’t changed at all, which means your math equation, the exit possibility has definitely gone up. It’s more profitable to sell this cow than it used to be.
Josh White:
History tells us that the exits of the older dairymen and the smaller dairies doesn’t really change based on economic conditions, it’s relatively stable. Maybe there’s some risk that we have some pent up exits and some risk that it’s never been a better time to retire.
Mm-hmm. And you get some smaller dairies that decide to exit. That doesn’t move the needle.
Ted Jacoby III:
I would suspect. You’re right. We’ll see.
Josh White:
One [00:19:00] quick remark that’s important is the outlook on demand. It seems like the market is very, very bearish because supply is outpacing demand globally and it’s in every major milk shed.
But demand by import regions has been pretty good. Mm-hmm. They’ve been buying year over year, more dairy products. At the same time, I don’t believe there’s any region in the world that’s currently sitting on cumbersome overall dairy stocks, whether that’s from the import regions or the production regions.
Everyone seems to be quite aware that you gotta stay in front of this. I don’t know how to interpret that. On one hand, you could say that based on some of the economic outlooks, globally, we shouldn’t be expecting things to get better. We should be expecting them to get at best the same or possibly even worse.
On the other side of that equation is import dairy consumption and demand is growing and continues to grow, so it might be a painful period, but the long-term [00:20:00] outlook remains pretty good, and we just overreacted to some of the demand signals that we have. Credit to the dairymen in the world, being able to respond to signals that we needed more fat, not even a year ago.
That whey protein demand’s good. I mean, the market has responded, but overall we’re not talking about an oversupply situation because demand’s bad. If you go granularly, like U.S. cheese consumption, doesn’t look real great right now.
The outlook for overall economic health, I’m not an expert in that area, but I’m not seeing a lot of people talking about a rosy 12 to 24 months there. So, yeah, I think generally speaking, it’s easy to be bearish, but maybe that’s one thing to pay attention.
Ted Jacoby III:
You mentioned demand. I happened to be involved in a conversation yesterday with an equities trader and his comment about stock valuations, equities, valuations, which was really a demand comment, was, I’m just waiting to see what Christmas sales do. I think there’s a lot of people out there right now that are trying to get a feel for what’s [00:21:00] the long-term demand or the 2026 demand perspective, and I think a lot of them are gonna judge what it really is based on how this holiday season plays out.
All right guys. Hey, thanks for a great conversation. I apologize to all the dairy farmers out there that I couldn’t give you any better news, but hang in there that good news will come eventually.
That’s right.
