Cheese prices plunge as federal reforms loom. Feed costs drop 10% but regional gaps widen.

EXECUTIVE SUMMARY: CME dairy markets reversed gains this week, with cheese prices dropping sharply amid weakening restaurant demand and export uncertainty. Federal Order reforms set for 2026 threaten to reshape milk pricing, while $8B in regional processing expansions creates uneven opportunities. Feed costs are projected to fall 10%, but Pacific producers pay $3.45/cwt more than Midwest peers. Component values declined significantly, with protein prices down 12¢/lb, slashing revenue for high-component herds. With cooperatives split on strategies and plant utilization rates varying wildly, producers must tailor risk management to their region. The USDA’s Dairy Margin Coverage program offers critical protection ahead of March deadlines.

KEY TAKEAWAYS:

• Federal Order reforms could slash milk checks via higher manufacturing allowances but reward high-component producers
• Regional processing expansions favor Midwest cheese makers, while Southwest faces discounted pricing from excess capacity
• Feed costs vary by $3.45/cwt regionally – Pacific herds pay 35% more than Midwest counterparts
• Protein value crashed 12¢/lb, costing a 100-cow herd ~$2,880/month
• Act by March 31: DMC enrollment offers catastrophic coverage at 15¢/cwt

The Chicago Mercantile Exchange (CME) dairy market showed a notable reversal from the brief recovery seen earlier this week, with cheddar blocks falling 0.50 cents to $1.6225/lb and barrels dropping 2.50 cents to $1.6300/lb. This decline comes after both products had experienced gains during the week’s early trading sessions. Butter prices slightly increased by 1.00 cents to reach .3100/lb amid active trading.

The market retreat reflects persistent demand uncertainty despite the tightening milk supplies projected by USDA. 2025 production is forecast at 226.2 billion pounds (down 700 million pounds from last month’s report). This price weakness coincides with significant structural changes underway, including the pending implementation of Federal Order reforms expected to modify how milk is priced starting in early 2026.

PRICE TRACKER: Component Values Under Pressure

Today’s closing prices reflect significant week-to-week volatility across major dairy commodities:

WEEKLY PRICE PROGRESSION ($/lb.)

Federal Order Class Price Implications

For producers wondering how these CME prices translate to your milk check, the USDA NASS survey prices (which lag CME movements by 2-3 weeks) are showing the following impacts on component values:

FEDERAL ORDER COMPONENT VALUES ($/LB.)

The protein price has been particularly affected by the recent weakness of the cheese market, dropping 12 cents per pound. For a 100-cow herd producing 75 pounds of milk per cow daily at 3.2% protein, this protein decline alone represents approximately $2,880 in monthly revenue reduction.

PROCESSING CAPACITY: Regional Expansions Create Opportunity & Risk

The $8 billion investment in new dairy processing capacity is distributed unevenly across dairy regions:

MAJOR PROCESSING EXPANSIONS BY REGION

Current plant capacity utilization rates vary significantly by region:

• Northeast: 91% utilization
• Upper Midwest: 87% utilization
• California: 84% utilization
• Southwest: 78% utilization

These regional differences explain why some producers face base programs restricting production while others receive incentives for increased volume. The Northeast’s high utilization rate has led to substantial over-order premiums, while the Southwest’s excess capacity has resulted in discounted pricing relative to Federal Order minimums.

MARKET RETREAT EXPLAINED: Demand Concerns Outweigh Supply Tightness

Why did markets retreat after early week gains? Three primary factors:

1. Restaurant sales data disappointed: The National Restaurant Association reported a 3.2% decline in same-store dairy product usage for February, with pizza chains showing particularly weak performance.
2. Export demand faltered: After initial optimism about Chinese buying, confirmed purchases fell below expectations. Chinese whole milk powder purchases were 23% below projected levels at this week’s Global Dairy Trade auction.
3. Federal Order reform uncertainty: Processor buying patterns have become more conservative ahead of the USDA’s final decision on Federal Order changes expected next month, which could significantly alter class price relationships.

These demand-side concerns outweighed the fundamentally supportive supply picture, demonstrating the market’s current focus on consumption rather than production trends.

COOPERATIVE STRATEGIES: Mixed Approaches to Current Markets

Major dairy cooperatives are adopting divergent strategies to manage current market dynamics:

• DFA (Dairy Farmers of America) has implemented base programs in several regions, limiting production to 95% of established historical production levels with significant penalties for excess milk.
• Land O’Lakes is expanding value-added processing capacity while maintaining production flexibility for members.
• California Dairies Inc. is pursuing aggressive export strategies to offset domestic market weakness, mainly targeting Southeast Asian markets.
• Select Milk Producers continues expanding ultra-filtered milk production for protein-fortified beverage markets.

For producers, these different cooperative approaches mean that identical milk composition and volume can result in significantly different mailbox prices depending on your cooperative’s marketing strategy and processing assets.

FEDERAL ORDER REFORM: Potential Game-Changer for Pricing

The USDA’s Federal Milk Marketing Order modernization proposal, expected to be finalized next month, contains several provisions that could significantly impact your milk price:

1. Class I mover calculation changes: Likely return to the “higher of” Class III or IV plus 74 cents, replacing the current average plus 74 cents formula.
2. Make allowance adjustments: Manufacturing cost allowances will likely increase by 20-25%, potentially reducing producer prices by 45-60 cents per hundredweight.
3. California included in the uniform system: California producers will transition to the same component pricing system used in other Federal Orders.
4. Depooling restrictions: There are new limitations on the processor’s ability to remove milk from the pool during volatile markets.

The combined effect of these changes will vary significantly by region and farm milk composition. Preliminary analysis suggests that high-component producers in the Upper Midwest may benefit, while fluid-oriented markets could see reduced producer prices depending on specific utilization patterns.

FEED COST OUTLOOK: Margin Improvement Opportunity

One positive development for dairy producers comes from the feed cost side of the ledger. The USDA projects feed costs will decline 10.1% in 2025, providing crucial margin relief during uncertain milk prices.

Current feed cost components reflect moderating prices compared to recent years:

• Alfalfa hay: $195.50 per ton
• Corn: $4.89 per bushel
• Soybean meal: $410.02 per ton

These ingredients contribute to an average DMC total feed cost of $10.94 per cwt of milk sold, which remains historically elevated but trending in a favorable direction for producer margins.

REGIONAL FEED COST VARIATIONS

These regional feed cost variations highlight why standardized national price reporting doesn’t tell the complete story for individual operations. Pacific region producers face feed costs of $3.45/cwt higher than Upper Midwest counterparts, a difference exceeding the average operation’s profit margin.

PRODUCER PLAYBOOK: Regional Strategies

Given the varied regional dynamics, consider these tailored recommendations:

Northeast Producers

• Capitalize on high plant utilization rates by negotiating more substantial over-order premiums.
• Carefully evaluate protein-enhancing feed additives, as the protein price-to-feed cost ratio remains favorable despite recent declines.
• Monitor Northeast cheese processing expansion for potential competitive milk pricing later this year.

Upper Midwest Producers

• Position for Federal Order reform implementation with a focus on component optimization
• Consider a forward contracting portion of milk with the 8.2 million pound/day processing expansion, creating a potentially competitive pricing environment.
• Evaluate the opportunity to lock in favorable local feed costs, which are currently the lowest among significant production regions.

Western & Southwest Producers

• Assess the implications of California’s transition to a Federal Order component pricing system.
• Monitor cooperative export strategies as domestic markets remain challenging.
• Consider production adjustments to avoid base program penalties in regions implementing such restrictions.

All Regions: Risk Management

The USDA’s Dairy Margin Coverage (DMC) program enrollment deadline (March 31) approaches. With USDA forecasting margins in the $13-$14 range for 2025 but significant downside risks from demand uncertainty, the 15-cent per hundredweight cost for $9.50 coverage represents cost-effective catastrophic protection.

MARKET OUTLOOK: Mixed Signals Require Strategic Flexibility

Factors affecting your milk check extend far beyond the daily CME price movements in this complex and rapidly evolving market environment. The combination of Federal Order reform, regional capacity expansions, cooperative marketing strategies, and international market dynamics creates a challenging but potentially opportunistic environment for well-positioned operations.

While today’s market retreat signals continuing demand challenges, the fundamental production constraints from declining replacement heifer availability and moderate feed cost improvements suggest the potential for stronger markets later in 2025 if demand recovers. The Bullvine will continue closely monitoring these developments to provide actionable market intelligence tailored to your regional context.

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