Milk production is up 4.5% — but somehow, milk is clearing. Something doesn’t add up.

In this episode of The Milk Check, the team uncovers the shifts reshaping dairy economics in 2026.

Ted Jacoby III leads a classic market roundtable with the Jacoby team to unpack what they’re seeing as dairy transitions out of the holiday demand season and into early-year reality.

Despite 4.5% year-over-year milk production growth, milk is clearing in many regions. Cheese and butter markets are under pressure, but inventories aren’t yet burdensome. Protein markets remain tight. And nonfat dry milk is showing surprising strength.

So what’s going on?

In this episode, we cover:

• Why added processing capacity may be masking where supply is really long
• How cheese and butter are absorbing milk that would normally back up at the farm
• Why protein demand is tightening skim solids and whey markets
• Whether nonfat’s recent rally is real or a phantom
• And which dairy market narratives the team thinks are wrong right now

If you’re trying to make sense of conflicting signals across milk, fat, protein and powder, this episode delivers the context behind the numbers.

Listen now to The Milk Check episode 90: The Market is Lying to Us.

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: 27:01 — 9.3MB)

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Ted Jacoby III: [00:00:00] Am I just being a conspiracy theorist?

Diego Carvallo: I would probably bet a little bit on that conspiracy theory.

It could be. It could be possible, Ted. Who knows.

Ted Jacoby III: Welcome to the Milk Check from TC Jacob and Company, your complete guide to dairy markets, from the milking parlor to the supermarket shelf. I’m Ted Jacoby. Let’s dive in.

We’re on the new side of the New Year. It is January 12th. we’re gonna have a classic market discussion today. Things have started to settle down from the holidays and I thought it would be a great idea just to share with everybody what we’re seeing in the markets as we’re transitioning from the high-demand season into the low-demand season.

We have our usual suspects today. We have my brother Gus who manages our fluid group. We’ve got Josh White, head of our dairy ingredients group. We have Joe Maixner, head of all of our butter sales.

Mike Brown, our Vice President of Market Intelligence, and myself. So, we’ll start with milk, Gus. What’s it look like right now?

Gus Jacoby: It certainly isn’t tight, but it isn’t really long either.

I think the November milk production was up [00:01:00] 4.5% and that typically would be fairly significant in areas where there isn’t a lot of additional processing capacity. One would think it would be very, very long with that kind of growth, but we’re not seeing that. Areas like the upper Midwest, Mideast, those areas are not as long as we thought they would be. I don’t want to act as if it’s tight. That’s not the case. Through the holidays, there was still plenty of milk that was around. But I think here as we climbed out of the New Year holiday and into mid-January, things have gotten fairly what we would say in balance.

And that’s a little bit alarming considering that type of milk production growth.

Ted Jacoby III: Why do you think that is? Is it just all the new capacity from all the new plants that have been built, or what else is going on?

Gus Jacoby: Well, certainly in that western, upper Midwest and Southwest region, upstate New York as well, there’s been a lot of processing capacity that’s been added.

So, those areas have been able to soak up that extra milk. I think milks travling a bit but I also think folks have found a little bit more efficient avenues to place the milk after dealing with some length over the past year [00:02:00] or so. But there’s a little bit of a question mark I have in the back of my mind as to how efficient we’ve been able to do so.

Typically, when we have this kind of large growth, anything north of 4% is large, and large enough to be concerned about. But nonetheless, the processing capacity is significant. We don’t wanna discount that. But one can certainly wonder why in areas like the Mideast, where you haven’t really added a lot of production capacity here recently, why we aren’t seeing a bit more milk floating around.

Ted Jacoby III: You think it’s just domino effect type things? Where, as milk is tighter in New York, so none of that milk is going into the southeast or into Appalachia, therefore it’s gotta be pulled from the Mideast?

Gus Jacoby: Ted, that might be a part of it.

I think domino effect is certainly going on here. There’s some areas of the country that don’t have enough milk because of that additional capacity we discussed. But having said all that, I think there’s some question marks out there right now as to why it isn’t a bit longer in certain parts of the country.

Ted Jacoby III: What about some, I’ll call it non-traditional demand growth, and what I mean by that is things [00:03:00] like ESL or some of the protein drinks? It looks like there have been new brands showing up on the supermarket shelf lately.

Gus Jacoby: If you’re alluding to areas like UF milk or high-protein fluid products there is certainly a lot of demand in that Class I, Class II segment of our industry.

Add in the fact that you have a lot of demand for fortification solids for cheese plants, skim can seem a little bit tight right now, and there’s some logic behind that, but I don’t think there’s enough ultra filtration capacity right now to satisfy demand. So, if milk is going in that direction, there isn’t enough UF units out there, I think, to fill that void.

And I wouldn’t say that’s the reason why we’re tightening up milk supplies by no means. In some parts of the world, yes, that might be the case, but that’s pretty small in the grand scheme of things.

Ted Jacoby III: On the fluid side, is skim solids slash dairy protein tighter than the butterfat side?

Gus Jacoby: Absolutely it is. Yes. I don’t think there’s any question about that. You’ve got two things driving [00:04:00] that. Too much butterfat requires cheese plants to gather more fortification solids, and the demand for protein right now is through the roof. You’re gonna have it hit from both sides and they’re hitting pretty strong.

Ted Jacoby III: Could that extra skim solid slash dairy protein demand be what’s tightening up the milk market? Are we seeing it, for example, in lower cream multiples?

Gus Jacoby: There still is plenty of cream around, to answer that question directly. I just don’t think there’s enough UF processing capacity at this moment in time to say that it’s tightening milk by any means.

Ted Jacoby III: Could it be cheese plants taking the milk directly off the farm but spinning off a lot more cream?

Gus Jacoby: I would say some of that is gonna go on. Yeah. ’cause there’s not enough fortification solids to be had, or at least not at the price the cheese plants are gonna be happy with. Cheese plants, even though they might prefer UF at times, they’ll take different types of skim solids and that certainly will tighten up that skim side of the market. That, combined with the fact that the protein sector is short, certainly you’re gonna have that element in our [00:05:00] market right now.

I just think there’s enough milk out there, Ted, and not enough protein, isolation capacity of any sort to be the main reason as to why you’re not as long on milk as you think you should be.

Ted Jacoby III: You know, I’ve had a theory going for a little while that all this extra capacity we’ve added, a lot of it is cheese capacity, and I feel like this time around, we’ve just transferred where we’re feeling the length.

We’re not necessarily feeling the length in milk like we usually do. Instead, there’s enough processing capacity to get all that milk and to make cheese out of it. And therefore, we’re seeing the length in cheese, and we’re seeing the length in butter. And that’s why those two markets have been under so much pressure lately, whereas the milk market seems to be in balance.

We’ve just moved down the supply chain a little bit where the length is manifesting.

Does that make sense?

Gus Jacoby: A little bit? Yeah.

Mike Brown: It Does Make sense. Where you have new plants, they wanna be full. They’re cheese plants. They’re gonna try to fill those plants with milk to the extent they can market product, which is becoming a [00:06:00] concern as we see the CME cheese price continuing to drop. We’re also reaching a point when fat is very high, you can’t afford to fortify cheese vats because your skim solids price is high relative to fat. Right now everything’s kind of low, but powder relative to cheese, is as high as it’s been in quite a while.

If you have revenue from waste stream, fortifying with nonfat or skim solids makes a whole lot of sense. But if you’re paying that full price for the casein portion of that skim, it gets closer again now too. It’s a little different situation than it’s been in a while. I don’t think Gus could be any more right about the need for more ultra filtered capacity. I’m just curious where it’s gonna show. Because the demand certainly seems to be there.

Ted Jacoby III: If there’s one place where I think maybe we’re underestimating demand, it’s in that ESL protein space. And I agree with Gus, there’s probably not enough capacity to really manifest all of that resting demand or untapped demand, but I bet we’re maximizing that supply chain everywhere we can, especially given what we’re seeing in the whey protein [00:07:00] market right now.

And it doesn’t show up in the data really clearly. You’re up four and a half percent in milk. Some of that is, we’re still measuring against weakness and we’re measuring against the bird flu outbreak that was happening a year ago.

I just think there’s also some demand there possibly in that space that isn’t really showing up in the data in a way that makes it clear to everybody we’ve got some good demand in a couple of places. Having said that, I also think we’ve got more than enough cheese right now.

We’ve got more than enough butter right now. But in both cases, and I’m gonna throw this at Joe I don’t think the inventories, at least what’s showing up in the cold storage data is telling us the inventories are burdensome yet. And that might just be when we are in the calendar, but it could just be we’re finding new places for demand.

Joe, what are your thoughts?

Joe Maixner: Yeah, inventories are definitely not burdensome right now. We’re coming off of pretty good draw down over the holiday season. Obviously, we’re really early into the inventory build period. But demand overall, coming back from [00:08:00] the holidays here, has been pretty strong out of the gate for the New Year.

Everybody’s coming back to the office. They’re seeing these very depressed prices. And there’s been a lot of interest in both spot volume, building up some inventory on some spot buys, as well as some additional contract volume for the remainder of the year.

So, going back to your comment on inventories, the one thing we always have to keep in mind with looking at cold storage is that number is all types of butter sitting in warehouse inventories. When it comes to pricing, the only thing that matters is 80% CME eligible bulk. We still have a fair amount of salted bulk, especially the older production, in people’s hands, and that has been showing up in the marketplace.

A lot of that’s because there was not a lot of micro fixing for the holiday season. Cream was plentiful. People were making plenty of product outta fresh cream as opposed to reformulating that older butter into the retail pack. I think that there’s not a lot of fresh production being made right now [00:09:00] in the salted variety.

We could see a nice little price pop here in the coming months once that older product becomes ineligible on the CME.

Ted Jacoby III: It’ll be interesting to watch. It’s funny, I think there’s some interesting similarities, not with the old crop, new crop issue, but just some similarities on the cheese side.

There’s an old saying about an anticipatory bull market where people start driving up the price ’cause they’re afraid of not having product tomorrow. This just feels like an anticipatory bear market where the inventory levels in cheese aren’t saying that we’ve got a massive amount of length and oversupply of cheese.

But you can’t help but wonder if the reason the price is so low is because there is no one out there, both because they’re looking at their forecasted demand for their product and they’re looking at the forecasted milk supply, there’s just no one out there who has any worry about being able to get the cheese they need tomorrow.

And so there’s no reason for them to go out there and buy the cheese today and tie up their capital when they’re pretty confident they’re gonna be able to get it tomorrow, maybe even at a lower price. And I get the feeling that there’s some similarities [00:10:00] in the butter market, too.

But let’s switch over to the powder side. We’ve been talking about the strength in the protein market for a while, but lately we’ve been seeing some strength in the nonfat market.

Diego, is that real strength is that long-term strength? Have we found a bottom in nonfat, what’s going on there?

Diego Carvallo: Ted, it’s a very, very interesting question. It’s something everybody’s discussing and commenting about, right? The nonfat market feels like it’s way tighter, the spot market, than what most people were expecting.

Right. And the funny thing is everybody has a different theory on what could be happening. We’re not sure what’s gonna happen in the coming months, but there’s definitely a few theories on why this market could be tight and why we’re seeing this kind of short covering rally that we saw in the past two weeks. There’s theories about more UF capacity in areas like the Midwest, which is creating a premium for that product in that region.

There’s also theories of some plants in California [00:11:00] mainly being down during the months of November and October, which could have also created a shortage of product that needed to be delivered. Some point also to Mexico or the domestic market stepping in when prices reach the $1.10 or $1.15s and buying decent volumes.

But the fact of the matter is, market is a little bit tighter, way tighter than what most anticipated at this period. At the same time, most people are expecting because of ample availability of milk in regions like California, that the market is gonna have to start building inventories because we are, I don’t know, 15 cents or 20 cents higher per pound than Europe.

So we’re definitely not gonna be able to export a lot of product to Asia, to the Middle East, or to even Latin America at these prices. So, yeah, the market is tight, but the medium-term outlook is still that we’re gonna [00:12:00] see plenty of pressure.

Ted Jacoby III: Any difference in price right now between skim milk powder and nonfat dry milk?

Diego Carvallo: That differential between the two has shrank has been smaller because if you talk to most plants in California, everybody’s running nonfat at full capacity. Their plants are almost all of them at full capacity and nobody’s making skim this time of the year. It’s a throughput matter. They try to make as much nonfat as possible when they have plenty of milk.

Ted Jacoby III: Interesting. You’d think if prices were going up in the U.S. but not going up in Europe, it would widen, but it’s actually shrinking. That’s wild.

Diego Carvallo: Exactly. Yep. And with the U.S. making a lot of nonfat, all of that is gonna go into NDPSR, there should be pressure. At the same time, this week we have the ONIL tender, which most of the market is expecting a result and following it closely because if Europe doesn’t sell that tender, they’re gonna have more product and more pressure on their product.

Ted Jacoby III: Makes sense. [00:13:00] Well, Europe’s had some surplus milk as well. Is it possible this market in the U.S. is popping because some of the European traders want it to pop so they can make sure that they clear the excess European product? Or am I just being a conspiracy theorist?

Diego Carvallo: I would probably bet a little bit on that conspiracy theory.

It could be. It could be possible, Ted. Who knows.

Ted Jacoby III: Got it. All right. Sounds good. Josh, what’s going on in the whey market? We just keep talking about tight. Has anything changed?

Josh White: No. It remains pretty tight. I think the whey protein demand seems strong. I will say coming into the year I’ve seen more product trade on the spot market, which is interesting.

But the tale or the storyline is that that spot trade is still met with good demand and those prices are all still higher than the first quarter negotiated prices to many of the large users, meaning that there’s still good demand at these high prices, and the consumer hasn’t even seen these high prices yet.

So it seems like it’s the same in Europe. First quarter is pretty much locked. Second quarter maybe there’s more vulnerability, but at the moment, I think that the [00:14:00] majority of the market would bet that we remain firm through the second quarter maybe even see some higher prices. I think what’s interesting if you look at the market is on the sweet whey powder side, you’ll have Europeans even comment that the whey market is a little bit firm, but they’re quite a bit lower than our price right now.

And if you look at the forward futures prices, we have a classic short market. It’s inverted. It’s significantly inverted. And it’ll be curious to see if we really have that much additional sweet whey powder to either move the prices lower or we get enough demand pushback and reformulation to result in some extra product being available.

But at the moment, across most of the whey complex it’s fairly firm, which I think tells the story. I mean, we went through the northern hemisphere’s lower milk production months, albeit we’re reporting really high year-over-year numbers, as you commented, compared to bird flu of a year ago in the West.

People have had every incentive to place milk in any utilization other than butter and powder over the last few [00:15:00] months, and the market seems to be doing that. In addition to all of the other little comments, it feels like consumers knew that and really ran their supply chains pretty thin.

And coming out of the holiday period, there is some short covering happening. Whether that’s just a derivative, speculative position short covering, physical short covering, it’s happening. In addition to that, when we look at the U.S., you can’t paint with a broad brush. The west seems to be running a lot of powder.

The Midwest is not. And so that’s created a little bit of a tight situation here. So when you add the demand in Mexico for nonfat you add Midwestern pipeline filling, it’s enough that our spot market is carrying a really big premium to the rest of the world.

We’ll see if that can continue as our daily milk production increases seasonally, both here and in Europe. I think that as that continues, as milk goes up, does that directly translate to butter and powder production going up? I would argue at least on some of these products, we know that the [00:16:00] WPI dryers are full.

We know the WPC 80 dryers are full. I suspect that the MPC dryers are full and all of the fluid products going into those Class II products are probably full. So we’ll see if the market can handle the seasonal ramp up in production or not. And arguably, I think that’s what most of us are expecting.

We’re expecting that we’ve still got plenty of milk. Then that’s gonna have some price pressure. But I also would comment that if we look back over the past few months, demand has been quite good. Global demand has been quite good. The question is, will it continue to be quite good or did we do a lot of buying in the late third quarter and early fourth quarter to refill the global pipeline? Things like Chinese New Year buying things like Ramadan buying and others, and are we gonna be met with an air pocket in demand as we start this year? Don’t know yet.

The protein demand isn’t just in dry proteins or in UF for fortified milk.

Mike Brown: It’s in yogurts. It’s in cottage cheese. At the same time, ice cream’s lackluster, sour cream is no better. And so that demand for [00:17:00] protein goes beyond just ingredients. On the whey side, boy, we’re gonna have to see a real shift in whey protein prices, wouldn’t we, Josh?

We all know those dynamics can shift, but we’re a long ways from that. Other thing in California has got so much milk, they’re running everything full. If you look at anyone you talked the point made earlier, they can’t make SMP right now.
They can’t, they are that full to the tilt. In fact, some of them are putting in production control programs again because they’ve got so much milk. Will milk move around, particularly if you can’t find a home for cheese no matter what the price is?

Ted Jacoby III: The fact that California’s already running full and it’s the middle of January, which means we probably have at least a month and a half until they hit the peak of their flush.

Mike Brown: Absolutely.

Ted Jacoby III: That’s a Little bit concerning to me.

Mike Brown: Yep. It, it should be to everyone and their spot prices show it. Cream’s been bad, and even the Midwest Class III spots are weak, but part of that’s because the cheese market’s weak.

And that lag in Class III, which isn’t picked up in that weekly CME price until next month at the earliest. There’s signs that we’re seeing some shifts in the three four spread. We keep this up, [00:18:00] Ted, it’s gonna go away. Yeah. That may change where milk ends up.

Ted Jacoby III: Yep.

Diego Carvallo: I have a quick question, Ted. Where do you expect this extra milk in California to end up, because it seems it’s very early. I’m already hearing a lot of milk dumping in California. It seems like we’re at capacity in California.

What’s the natural spill over for that milk?

Ted Jacoby III: I’ve got two thoughts, but I wanna ask Gus a question first. Gus, if there’s one place where there might be extra UF capacity, would it be in California?

Gus Jacoby: Perhaps, but probably not. Relative to demand. It’s limited pretty much all over the country.

Ted Jacoby III: Okay. So what I’m gonna answer, in Diego’s question, first and foremost, we’ve lost a lot of milk in the Northwest. Yes. So I wouldn’t be surprised if it heads north on Interstate 10 and ends up in one of those plants in the state of Washington. That would be my first guess. My second guess would be the reason that I asked that question of Gus is they keep the butterfat in California and make butter out of it.

Then they ship the UF milk to a cheese plant in the [00:19:00] southwest to extend the cheese yields there. If I were to guess it would happen in one of those two ways.

Mike Brown: Diego, what you’re describing is exactly why they’ve put some production quotas back in California because they know it’s gonna get worse.

And it makes perfect sense . To me, it’s gonna end up wherever the landed price is the best. On fat capacity, if California has the room to process fat, it’s gonna be in their best interest to process it. ’cause the people that buy surplus fat, outta California, that’s some of the lowest multiples in the country. Even when markets are tight. They’re not gonna wanna send that fat to Utah, Nebraska, or Washington State, or anywhere else if they can process it locally and store it.

’cause it’ll be just moving less water, it’s gonna be mm-hmm. To their benefit. And to Joe’s point. Butter markets are reasonably sound. I mean, they’re lower, but it doesn’t sound like we’re over big supply yet. But one thing we haven’t talked about much is that I think a lot of this price is gonna depend on if we keep exports strong.

And that’s one of the big questions we all have. Are they gonna stay? I mean, certainly I think, Joe, listening to you talk, that’s helped a lot in [00:20:00] butter because we’re moving more than 82 overseas and we’re making more of it. On the cheese side. I’m hearing from some of the big cheddar guys that they’re still exporting cheese and relieved to do that.

Prices are of course lower, but to me that’s really key. Particularly for products that aren’t as storable as powder. What are those trade markets gonna be? That may impact, where milk goes. Because even if cheese is a buck 30, if you sell it for 30 under, ’cause you have an oversupply, you’ve lost money.

So that’s not something you’re gonna wanna do.

Ted Jacoby III: All right. Well if I were to summarize really quickly what we’re seeing out there, I would say on the milk side, milk is clearing, which feels a little bit surprising given that we’re up 4.5%, but it’s probably due to all the extra capacity we have out there. However, on the butterfat side cream is long.

Butter is long. And while we may get a new crop, old crop pop, the length probably will never fully go away. It just may be how the butterfat’s being processed and maybe we’ll have a temporary tightness in salted 80%. On the cheese side, we’re making a lot of cheese and we’re building inventories.

[00:21:00] Mozzarella is feeling longer than cheddar because you can’t store mozzarella, whereas you can park cheddar in a warehouse if you want to, and that’s probably exactly what’s going on in the beginning of this year. Yes, we’ve got some exports but exports are not greater than they were at this time last year, though they may be at comparable levels, at least right now. But there seems to be a concern that that’s not sustainable like it was last year. On the nonfat side, that’s where we have some surprising tightness and we’re watching that market and we are watching it closely because there seems to be conflicting supply and demand indicators regarding where that tightness is coming from.

And so our real big question is how sustainable this current tightness is. And on the whey market, whey market is strong. It’s been strong, it continues to be strong, and we haven’t really seen anything yet to change that narrative. And that in general probably sums up our dairy markets.

I’m gonna ask everybody one lightning round question. What is one widely repeated dairy market narrative that you [00:22:00] think is wrong right now? Mike, I’m gonna start with you.

Mike Brown: I think if there’s anything that is wrong or uncertain is how quick the response is gonna be to really, really low prices on milk supply. I still think we’re gonna take a while to back down and the folks that have really invested in and figured out the beef market are gonna be strong, but people that haven’t done that are gonna really get pummeled. So I think that’s it. How quick will we respond to the lower milk prices? How quick will market respond? It could be quicker than we think.

Ted Jacoby III: You think it’ll be quicker.

Mike Brown: I think it could be quicker. And I’m a good economist.

I’m not gonna say it will, I’m gonna say it could, but yes, I think it could be a little quicker. Particularly with beef, with cull prices so high, there’s incentive to liquidate herds if you don’t wanna milk cows anymore right now.

I’m not talking the 10,000 cow herds. I’m talking the smaller Midwest herds.

Ted Jacoby III: You got it. Gus, what about you, one widely repeated dairy market narrative that you think is wrong?

Gus Jacoby: I always have contrary perspectives on things. I don’t know what to tell you except, back to what I said originally. [00:23:00] Milk is just simply even with high growth production numbers, it’s not as long as some people might think in areas of the country where we haven’t added too much pricing capacity.

All right. Sounds good. Diego, how about you?

Diego Carvallo: I would say a lot of people are expecting farmers to be losing money at this level, and I think that’s wrong.

Ted Jacoby III: They’re still making money.

Diego Carvallo: Or maybe breaking even.

Ted Jacoby III: All right. I like that one. Joe, how about you?

Joe Maixner: I’m gonna buck Diego’s thoughts. I’m gonna go off a nonfat trend.

I think that the nonfat market’s gonna continue to trend higher this year as opposed to fall back off.

Ted Jacoby III: That’s a good one. That’s a good one. I will struggle with that one, but more power to you. Josh, how about you?

Josh White: “This time’s different.” I don’t think this time’s any different than the prior times.

I think it’s all perspective. Prices are gonna do what prices do to demand eventually. I realize that we have nuance to our markets, particularly with whey proteins, GLP-1 inspired demand, things like that. But I don’t know that I’m a subscriber to “this time’s different.”

Ted Jacoby III: All right. Well, I’ll go ahead and venture mine out there, and I’m gonna have fun with it because I’m gonna [00:24:00] take the exact opposite side of the aisle from Mike and Gus, and I’m gonna say, I actually think this particular drop in prices is gonna last longer than the traditional six months. Usually you see it takes about six months for a market to bottom out and some of dairy farmer habits to change and see the market going back up. But I’m actually on the side of Diego. I think dairy farmers at this price are even still making money because they’re getting so much money from breeding to beef and in some cases from selling their manure. And as a result, their balance sheets will remain healthy.

And they’re not gonna be under pressure to exit and sell their cows. I also believe that high beef prices have the inverse effect of what you would expect. And they don’t mean people will sell more cows. It actually means they’ll sell less because dairy farming’s a way of life. And so they’re gonna sell fewer cows to stay cash flow positive rather than more.

And so I actually think that this one’s gonna take a lot longer than six months to adjust, but I think what’s really healthy is the fact that we have a diversity of opinions here, which means nobody really knows what’s gonna happen next. Alright guys, I thought [00:25:00] this was a great discussion.

And, as it always is in the dairy industry, may we live in interesting times and this one’s not gonna be any different, is it? So thanks everybody for listening in. Great discussion today. Guys, thanks for joining us.

Mike Brown: Thank you.

Josh White: Thank you guys.