Nonfat prices have moved sharply higher in recent weeks. But the rally isn’t being driven by a sudden surge in demand. It’s being driven by a breakdown in where milk is actually flowing.

In this episode of The Milk Check, Ted Jacoby III and the Jacoby team unpack insights coming out of the IDFA Dairy Forum in Palm Springs and explain why nonfat prices have surged nearly 25 cents in just weeks, even as milk production remains strong.

The issue isn’t price resistance. It’s availability.

Milk that the market expected to move into dryers is instead being diverted into cheese plants, ultra-filtration, whey proteins and other higher-value protein streams. As a result, powder supply is far tighter than headline production numbers suggest.

Layer in heavy short positioning, processing disruptions, and new offtake agreements, and the market begins to resemble a classic short squeeze.

In this conversation, the team breaks down what’s actually driving NDFM and why higher prices haven’t unlocked new supply. We cover:

• How protein economics are pulling milk away from powder
• Why rising milk production hasn’t translated into greater availability
• Key structural differences between the U.S., Europe, and New Zealand
• Where the market may find its next equilibrium, and what could disrupt it

If you’re relying on historical assumptions about nonfat availability, this episode explains why those assumptions may no longer hold.

Listen to The Milk Check to understand what the evolving nonfat landscape means for pricing risk, exports and coverage decisions ahead. Available below or on Spotify, Apple Podcasts, Amazon Podcasts or YouTube.

Got questions?

We’d love to hear them. Submit below, and we might answer it on the show.

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Jacob Menge: [00:00:00] There are just so many of these long-held assumptions, things that people who have been in the industry a while probably have, like, “Well, my gut tells me this.” Question your gut.

Ted Jacoby III: Welcome to the Milk Check from T.C. Jacoby and Company, your complete guide to dairy markets, from the milking parlor to the supermarket shelf. I’m Ted Jacoby. Let’s dive in.

It is January 30th. We’ve all just got back from the Dairy Forum in Palm Springs, where it was a hell of a lot warmer than it is here in frigid St. Louis, Missouri. Joining me today is Diego Carvallo, the head of our international sales team and our head non -fat dry milk trader. We have Josh White, head of our dairy ingredients group, Jacob Menge, our VP of risk Management and Trading Strategy, and Mike Brown, VP of Jacoby Dairy Market Intelligence.

Guys, welcome.

What did we learn in Palm Springs? I think the biggest thing that came out of our visit and running into everybody at the Dairy Forum is that nonfat dry milk and skim milk powder really is tight.

We have a short squeeze going on in the nonfat dry milk [00:01:00] market. The market is up. I think it’s 25 cents in the last three weeks. I’ll let Diego explain to everybody what’s really going on in the nonfat market right now.

Diego?

Diego Carvallo: Ted, that’s a very loaded question right now. Everybody’s scratching their heads. As of right now, today, Friday the 30th, the market just closed. The whole strip is limit up — 4 cents up.

I think I hadn’t seen this in quite some time. IDFA was very interesting for a lot of people to discover why the spot market has been tight for this long and have good discussions on what the outlook looks like. Let’s start with the fundamentals. I think a few things are helping this market and supporting it and pushing it higher.

The first one is what a lot of people are discussing, which is the amount of UF being produced in regions like the Midwest. We all know that many of the plants have installed new capacity to have UF sales, and those solids are in great demand [00:02:00] for cheese fortification right now.

So that’s one of the reasons why the Midwest especially feeling this tight. Another reason is that the majority of the people who speculate with this market, and it goes from traders to manufacturers and even distributors, most of them have been short, expecting this market to move lower during the spring flush.

I remember a few months ago, the speculation was that we were gonna break the $1. And, it seems like everybody got short, physical and in the screen, and that market, obviously, whenever we saw a bounce, everybody ran to cover their shorts, right? Another reason is that we saw a few interruptions in processing capacity, especially in California during the months of November.

I think that also contributed to the tightness in the market without even getting into the conversation of new [00:03:00] offtake agreements that have taken up this year. So I think those are the main contributors to this market moving higher, and I think it’s something that is mainly affecting the U.S.

The rest of the market is following through. I think this scenario is very different when you talk about European and New Zealand production. It’s even different when you see the U.S., the West Coast versus the rest of the country.

Ted Jacoby III: Tell me about Europe. I know Europe started acting tight a little bit before the U.S., but what’s going on in Europe?

Nonfat, dry milk and skim milk powder is probably our most global market when it comes to dairy.

Diego Carvallo: So, Europe had a couple of large tenders that took place, I think that was beginning of January.

So, the infamous O’Neill tender and a few similar tenders that usually move a lot of product. Those tenders took place, and I think it helped clear some of the excess product that was available in the market. But I think in Europe we had a similar situation where most of the traders, most [00:04:00] of the end users and manufacturers, everybody was expecting prices to move lower, right?

Whenever we saw these tenders coming and the market slightly turned less bearish, I think everybody ran also to cover their shorts. But the situation in Europe has not been as bullish as it has in the U.S. The spread between the U.S. and Europe when it comes to skim has in fact widened as of right now.

Europe is also feeling the support. Definitely. It’s in part driven by the U.S. rally.

Ted Jacoby III: Well, that makes sense. I can tell you I had conversations with a few different manufacturers while I was at IDFA. And the best way I can sum up what the feeling was there’s a couple of dryers on the East Coast. Those dryers at this point are not expecting to ever run full this year, not even at the height of the flush, because there’s three new plants at various stages of development. There’s a new cheese plant in New York. There is a Fair Life milk plant in New York, and then ultimately a yogurt plant in New [00:05:00] York.

All three of those plants are gonna need the milk. It’s gonna come at the expense of the powder plants in that area. You look at the Southwest in Texas again, you’ve got two new cheese plants that are still in the midst of ramping up. They are getting first dibs on the milk at the expense of the nonfat dry milk plants down there.

So those plants are gonna get the milk that they expected. And there’s another nonfat plant that pretty much has turned a 100%, to Diego’s point that’s turned a 100% of their milk supply into skim UF that they’re supplying to various sources. And that plant is running the ultra filtration unit full.

So, that plant isn’t drying anything. You got a couple of dryers in the Michigan area. They’re not running as full as usually, but it’s more of a domino effect there. I have a hunch as you get into the flush, those dryers may fill up. But you’ve got four other dryers, maybe five that aren’t.

Now you go over to the west coast: California, those are drying. But California alone, as big as it is, is not enough to offset how much milk is not running into the dryers in the [00:06:00] rest of the country. And then you’ve got the Northwest, where there has been a lot of milk lost in the Northwest.

And so that dryer isn’t running as full as probably previously expected. What happened was everybody just got together, finally started talking when they were all together in Palm Springs, and they realized when they did the math, even if we’re up 4.4% in milk production, we’re not drying more nonfat.

Those skim solids are going elsewhere for various reasons.

Diego Carvallo: The biggest question right now, Ted, is the lack of product in the Midwest and East Coast could balance out the lack of exports that we’re gonna have from this price rally.

The numbers say that demand is approximately 60 million pounds. That number, it’s probably only 2% to 3% of U.S. nonfat production. So, it doesn’t seem like a huge number, but when you compare it to exports it is quite a volume.

Ted Jacoby III: It really does add up.

Yeah, no, I would agree with that.

Jacob Menge: It sounds based on what Ted had just laid out and what you had said earlier, Diego, that this [00:07:00] isn’t necessarily a demand-driven rally. It’s really a lack-of-supply-driven rally.

Ted Jacoby III: Yeah. A lack-of-supply-driven rally in an environment where everybody was expecting oversupply and kind of got caught surprised when they realized that even though there’s more milk, it didn’t fully translate to more powder.

Jacob Menge: So, what changes it? Price? How long? What does end game here look like? Based on what I’m hearing, sounds to me like there’s almost not a price that is all of a sudden going to bring more supply out of the woodwork.

So, is there a price that kills demand? People say, “Hey, we can’t make this number work anymore?”

Ted Jacoby III: I think, actually, Diego just framed it a few minutes ago in the right way. This lost production that we were expecting, is it enough to make up for the fact that international demand for nonfat and skim milk powder isn’t actually that great?

I think he’s hit the nail on the head. Let’s face it, skim milk powder, nonfat, dry milk is kind of the ultimate dairy commodity, which means it’s more price sensitive than others. And we’re gonna get to a point when we’re gonna find out where that [00:08:00] equilibrium point is between demand and supply.

Josh White: There’s a few things that could tilt the scales a bit that I think we should just pay a little bit of attention to at the moment. You made a comment earlier that the production outta California isn’t enough to satisfy what we’re losing in terms of powder in the rest of the country.

I wonder though, as we seasonally ramp up our milk volumes in the U.S., if we don’t satisfy that difference at a certain moment. I’m certainly not suggesting that that should make us all bearish. But I do think that there’s something worth noting there. Jake, you made a comment a moment ago that it doesn’t sound like there’s a price that slows it down.

That same phenomenon is happening in Europe right now, and I think that Europe is also gonna seasonally increase their supply. They’ve got a lot of additional powder and there is a price out there that people substitute. There is a price out there at which you price out international demand.

What we’ve gotta try to reconcile is all of this additional demand for skim solids in the U.S. is [00:09:00] that replacing our need to be an exporter of skim solids? I don’t have the numbers in front of me, but it feels like a reach to believe that we’re consuming enough to take away our need to compete internationally for skim demand.

So that’s one thing that might just put a little bit of a seasonal ceiling on this thing as we move forward. The real question is, does that actually tilt us into a surplus situation again, or not? Big question that we should get our arms around. Additionally, I think that there is substitution within dairy. For the longest time, skim solids are very, very cheap.

And as mentioned, the fortification into the cheese vat has been a pretty clear decision. When butterfat dropped to the price levels that it did, it makes a whole lot of sense to fortify. As these skim prices move a bit higher and dependent on our cheese price outlook going forward, does that math shift at all?

I’ve heard arguments on both sides that the math does matter, and I’ve also heard arguments that the math really doesn’t matter. It’s all about [00:10:00] optimizing put through in the vat. So yeah, I think those are interesting topics for us to debate because those are the things that might tilt the market one way or the other.

Ted Jacoby III: When it comes to skim solids versus butterfat in the vat, and let’s not forget, with the increase in solids in the milk, especially in butterfat, you’ve gotten the ratio of protein to fat outta whack, which is driving an increased need of skim solids into the cheese vat.

The real math is: do you sell the cream or you divide the UF milk? Well, guess what? The UF milk is getting a lot more expensive right now. And so, you can make the case that you might actually force yourself to be comfortable selling the cream because it’s really a question of do you overpay for the skim solids or do you lose money on the butterfat if you sell the butterfat. At lower butter prices, for a couple of different reasons, you need a higher multiple on the cream in order to sell it.

And one of the big ones is cost of freight as a percentage of the butterfat price has gone way up. You compare a $1.50 butter to $3 butter and on a percentage basis, your freight costs are twice as much [00:11:00] now. Which ultimately, when it comes to surplus cream, will drive down the multiple that you’ll receive for the cream.

Josh White: You know, I don’t wanna shift gears, but I do wanna spend a moment just thinking about the milk production response and if our outlook shifted a little bit over the past month or two. ’cause going into the end of the year, it seemed like the U.S. and Europe were on a collision course, a game of chicken to decide who’s gonna be the first to drop price enough to see milk production slow down. Our global milk production, what is it up like 3.8% or something like that going into the end of the year on a solids basis, and no real sign of major change in the first half of the year, other than some signaling from European companies to lower their milk price and try to slow things down.

Is this recent rally, whether it’s a short covering rally or whether it’s temporary, is this pushing out that response, whether it’s in Europe or the U.S., even further than we previously thought?

Ted Jacoby III: I feel pretty comfortable saying no. And the reason I feel pretty [00:12:00] comfortable saying no, is for a couple of reasons.

The biggest one is nonfat milk production is less than 15% of the milk supply of the U.S. And so, this rally in nonfat prices, it’s affecting less than 15% of the milk supply. Translated over a 100% of the milk supply, it’s not that big a number. I’m not sure it moves the dial a huge amount.

Maybe I should back up a little bit because it’s now the higher of Class III and Class IV and Class I, and Class IV was trailing Class III by a dollar and now Class IV is ahead of Class III because of this rally.

So yes, you’re starting to drive up prices there, too, so maybe it is helping the dairy farmer in a couple of places. While I agree that you’ve gotten a sympathy rally with cheese and butter, unlike nonfat, there’s more than enough butter and there’s more than enough cheese out there. And so we don’t actually see a true challenge to accessing supply with those two. So, while you may see increased futures levels at the moment, I’m not sure that’s going [00:13:00] to translate for a long enough period of time, the increased price levels for those products.

Josh White: Just to play devil’s advocate, I think if you ask the market if fresh production of butter was readily available, the answer might be no.

Ted Jacoby III: It’s either one of two things. There’s a lot of 82% being made for export. Or you’ve got 30¢ to 40¢ of carry in the futures market, and if I’m a butter manufacturer, and I’ve got any kind of working capital, I’m making 80%, I’m parking it in my own warehouse, I’m hedging it out to capture that extra 40¢, and I’m telling everybody I’m sold out. Well, guess what? That butterfat is still available. Once you get past the old crop, new crop March 1st date, that math changes, that’s only a month away.

And I would even say you’re talking about the shortest month of the year, too.

Josh White: Cheese has the same forward curve right now. Maybe not quite as dramatic, but a pretty good healthy contango going forward. What’s different about the cheese market?

Ted Jacoby III: Cheese has a tendency to have carry in it when prices are low. The market is more used to this kind of carry in [00:14:00] cheese.

Jacob Menge: The shelf life too. Ted, I mean

Ted Jacoby III: that’s, that’s, well, that’s right. That’s the second one is cheese ages.

And so six month old cheese is a different product than 30 day old cheese. With butter, there’s a reason why the CME rules for butter is up to 12 months after December 1st production. Whereas with cheese, it’s basically a 30 day market. And that has to do with how the product changes over time as it ages.

Josh White: When we’re thinking about the cheese market, we’re talking about the U.S. milk production being up, year over year a lot. We throw a little salt on that because we recognize we’re comparing against bird flu impacted regions a year ago, but still lot more milk solids.

Lot more butterfat out there. But at the same time, we’ve added plenty of Class III processing capacity, at least through the middle part of America to process quite a bit more milk. How is the whey component playing into this right now? Do we think these plants are gonna be highly motivated to fill up because of the return they’re getting for the whey [00:15:00] products, despite the cheese, situation you just mentioned, or are we really testing that desire to wanna fill up some of these plants as milk volumes pick up seasonally here in the state?

Ted Jacoby III: So I can answer that question with the same answer two different ways. The first is: Please don’t forget that the Class III price ultimately insulates cheese manufacturers from major movements in price. If they’re having to sell all that cheese at a substantial discount to the market, they could be losing money making the cheese, but the reality is if they sell it anywhere close to the CME price, it’s still gonna be a net profit or at least a net break even for them on the cheese side. Meanwhile, if they have a whey protein dryer and they’re making WPC 80 to your WPC 90, Josh as you well know, as our primary whey trader, those are very, very profitable for cheese plants right now with the prices as high as they are.

Josh White: Unprecedented.

Mike Brown: Gives them a little room with a higher class IV price because of that return [00:16:00] from whey to pay a little more than the spread might normally indicate that they would. Just as a point of reference, if you look the most recent dairy production numbers we have products is for November, but Southwest was down 25% I think, in overall nonfat dry milk production. And they were 70% of the decrease over last year.

Ted Jacoby III: Yep.

Mike Brown: And you still have some plants filling up down there. Although, again, we’ll see what happens with this spread. But to the point we’ve all made earlier, it is a supply issue. And there’s no question those south central cheese plants in Kansas and Texas are a big part of the reason that there’s less milk going into powder.

Ted Jacoby III: I had someone earlier today make a comment, and I never quite thought of it this way. He was actually talking about cheese, but I think the exact same thing goes for powder plants. Because the solids in the milk is up, they need less loads of milk to make the same amount of powder. And the bottleneck in the process a lot of times is not the milk receiving bay.

So it literally means they have to take in less milk to get there. If you’re out in California, those bottlenecks are limiting how much milk they can [00:17:00] process. In the Southwest, they’re not.

Josh White: Right.

Ted Jacoby III: But demand for protein, I’ll frame it this way:

We’re seeing huge increases in demand for whey proteins. We’re seeing increases in demand for milk proteins. We’re seeing increases in demand for UF milk, not just by cheese plants, but by ready to drink milk bottlers, as well, who really wanna sell that high protein milk.

And that is what’s driving all of this. And it’s driving it away from the nonfat dryer, and it’s driving it towards cheese, which is a source of protein, whether it’s cheese or it’s the whey that comes off the cheese. It’s driving it towards those UF milk plants.

It’s driving it towards milk protein concentrate plants. It’s really all about that huge increasing demand for protein that’s driving this. I don’t think it’s that hard to make the correlation that this big increase in the demand for dairy proteins across the dairy spectrum is what’s causing this powder market to be tight.

Because it’s pulling milk away [00:18:00] from the nonfat dryer.

Mike Brown: Yeah. And certainly, you have a fair amount of MPC capacity, certainly in New Mexico.

If you can make a protein, you’re making a protein, I think, whether it’s milk or whey.
Ted Jacoby III: I think that’s exactly right.

So, Diego, where do we end? We were below a $1.20 three weeks ago. We’re at a $1.46 today. Are we gonna get to a $1.60?

Diego Carvallo: Ted, I do know that the $1.40 is a strong psychological resistance and the futures are very close to it. I’m gonna monitor it.

I don’t know how high we can go. At this point, it seems like a train, and I’m not gonna step in front of it. $1.50 is not impossible at this moment, but at the same time, I could tell you that we could have a strong correction also. So, very difficult to read right now.

Ted Jacoby III: We just talked about a real nice rally going on in nonfat. The rally we think is because the demand for protein is pulling milk away from the nonfat dryer. Meanwhile, I think we have more than enough butter, though it may not be available yet, in terms of new crop, 80% butter sellable on the [00:19:00] CME. We think that we’re gonna have more than enough cheese, colored cheddar, which tends to be the product that drives price on the cheese side.

So, even though we have had a rally in both of those products in futures, we’re not as strong of believers in the cheese market and the butter market as we are in the nonfat market right now. So, before we wrap up, we’re gonna do a quick lightning round question.

We just came out of the Dairy Forum. We had many, many conversations with a lot of different people. What is the one thing happening in the dairy market right now that we think people are overlooking?

Josh, I’m gonna start with you.

Josh White: The reshaping of how milk trades across the country. I’m certainly not in the best position versus our milk team to address that, but the changes in where we can process milk, how we can process milk, and who’s demanding the milk is reshaping how things move.

And I think that’s gonna test some of our experience and historical expectations for how a market responds to some of the signals we’re seeing now. I mean, let’s be real clear. Over the past 24 months, we’ve been surprised as a [00:20:00] dairy industry by two major things. It was not that long ago that you couldn’t get enough fat.

The dairymen responded and it surprised the market, I think, to a point where now we’re expecting to be a fat exporter for a while. On the other side, if we go back, not even 60 days ago, the argument was will nonfat break a dollar? Or not. And today, we’re talking about it being a very firm market and citing a bunch of reasons why that happened.

And the market, I believe, was surprised by that. So, if you’re a buyer out there, don’t assume that these markets can’t change and change fast. Definitely make sure you’re preparing yourselves for that because we just went through multiple years where there was almost no risk of getting access to nonfat supply, and we’re getting phone calls now where people need coverage right now and are having difficulties doing so.

Ted Jacoby III: Thanks Josh. Mike, how about you? What’s something that nobody’s talking about right now that we probably should be paying attention to?

Mike Brown: I think from the standpoint of the cheesemaker and that cost of those [00:21:00] protein solids is a three four spread flipping significantly. We’re $2 the other way again now.

That cost of fortification has gone up a lot. Even with a $12 WPI market. That’s a big number to work with. And I think just in general, the growth in demand, whether it’s ultra filtered protein, fluid products, or the new cheese capacity we underestimated how that would hit the supply of nonfat dry milk, and we’re now living that.

Ted Jacoby III: Excellent. Thanks Mike. Diego, how about you?

Diego Carvallo: I have two things. One is the dollar weakness is something I haven’t heard a lot of people talking about and how that influences the prices for all commodities. And the second one is, I think a lot of people might be overlooking Mexican milk production.

Ted Jacoby III: Up or down. Is it good or bad?

Diego Carvallo: From informal reports, it could be strongly up.

Ted Jacoby III: Okay. That would not be good for nonfat prices, would it?

Diego Carvallo: Correct. Yep.

Ted Jacoby III: Jake, how about you?

Jacob Menge: I’ll go with just the upending of all kinds of long held assumptions.

If you’ve got calculators you’ve been [00:22:00] using, dairy market calculators, between the milk price formula changes between dollar weakness changing between us flipping to be a fat exporter, throw it all out. There are just so many of these, probably long held assumptions, those kind of things that people that have been in the industry a while probably have like, “Well, my gut tells me this.” Question your gut. That’s my go-to train of thought moving forward.

Ted Jacoby III: I think that’s a good one. And I will say, I think people are underestimating what this whole breeding to beef thing going on with the dairy farmer is doing to their decision-making process when it comes to killing cows.

Everybody’s talking about how low the price is. Everybody’s wondering when this price will recover. And I keep asking myself, if every time a beef cow is born, you’re selling that cow for over a thousand dollars, why would you wanna get rid of that womb? ’cause that womb seems to be making you a lot of money.

To all of our listeners out there, thank you so much for joining us this week, and we look forward to talking to you soon. Take care out there.