Powder inventories surged 41%, while processors accelerated production despite looming trade wars. The January dairy products report exposes alarming disconnects between market signals and manufacturing decisions, threatening processor and farm profitability as spring production increases.

EXECUTIVE SUMMARY: The January 2025 Dairy Products report reveals troubling production misalignments that demand immediate attention. NFDM production jumped 11% despite inventories already 41% above last year, while cheese and butter showed minimal growth despite increased milk supply. Italian cheese varieties (+2.2%) outperformed American types (+0.2%), suggesting shifting market preferences. Meanwhile, processors appear to redirect components toward consumer packaged goods like ice cream (+20.1%) and cream cottage cheese (+18.0%) while neglecting export-oriented products just as trade tensions escalate with Mexico. These patterns create significant price risks as spring flush approaches and raise questions about long-term strategic planning throughout the supply chain.

KEY TAKEAWAYS:

• NFDM production surged 11% to 154 million pounds while inventories climbed to 299.3 million pounds, up 41% year-over-year, creating a dangerous market imbalance
• Italian cheese varieties outperformed American types, with mozzarella production up 3.6% while cheddar continued its 15-month decline.
• Butter production increased merely 0.5% despite high component availability, as processors shifted cream to ice cream (+20.1%) and cultured products.
• Whey protein concentrate production fell 10.4% while whey protein isolate jumped 19.9%, indicating a strategic shift toward higher-value proteins.
• Regional production patterns show Western processors focused heavily on NFDM (+15.2%) while Central region facilities led in cheese (+1.8%)

Steam billows from dryers running at full capacity across America’s heartland, transforming rivers of milk into mountains of powder that increasingly threaten to overwhelm warehouse capacity. The USDA’s January 2025 Dairy Products report, released yesterday, exposes troubling misalignments between processor decisions and market realities. Manufacturers appear to be doubling down on precisely the wrong products while ignoring clear warning signals from domestic and international markets.

Cheese Production Reveals Contradictory Strategies

January cheese production data unveils a strategic repositioning that demands closer scrutiny from processors and farmers. Total cheese output reached 1.21 billion pounds, inching up a modest 0.8% from January 2024 despite component-adjusted milk production increasing 2.2% nationally. This restrained growth suggests processors remain cautious amid looming capacity expansions and uncertain demand signals.

The most revealing aspect of January’s cheese data is the stark divergence between cheese categories. While American cheese production barely increased, at 0.2% above January 2024 levels, Italian varieties grew substantially stronger, at 2.2%. Mozzarella’s impressive 3.6% increase led this to 412.7 million pounds. This marks mozzarella’s third-highest January production, reflecting processors’ strategic pivot toward export-friendly and foodservice-oriented varieties.

Particularly concerning for farmers focused on American cheese components is cheddar’s continued decline, dropping 1.4% to 326.1 million pounds—marking the fifteenth consecutive month of year-over-year declines. While this represents a moderating decrease compared to previous months, the persistent weakness in a traditionally anchored U.S. dairy processing category raises fundamental questions about shifting consumer preferences and processor responses.

The Butterfat Allocation Mystery

The January report exposes a perplexing contradiction in butterfat utilization that demands explanation. How can butter production grow only 0.5% to 218.3 million pounds when component-adjusted milk production increased by 2.2% and butterfat yields reached near-record levels? The answer lies in a dramatic reallocation of fat to alternative product streams that offer processors better margins—but may ultimately undermine farm-level butterfat premiums.

Processors appear to redirect cream toward frozen and cultured products rather than churning butter, with ice cream production soaring 20.1% to 59.6 million gallons—the highest January level since 2016. Regular hard ice cream led the surge, but other categories followed: low-fat ice cream jumped 10.2%, frozen yogurt increased 14.1%, and cream cottage cheese production jumped 18%.

This strategic pivot coincides with concerning inventory accumulation. According to the USDA’s Cold Storage Report, butter stocks climbed to 270.2 million pounds by January 31st, representing a troubling 26% increase from December and 9% growth year over year. This inventory build-up during what should be the seasonal low point for butter stocks signals potential market imbalances that could eventually transmit back to farm-level component values.

Powder Markets: A Crisis in Waiting

The most alarming element of January’s report is the dangerous inventory accumulation in dry milk products. Despite already bloated warehouses, nonfat dry milk (NFDM) production accelerated sharply by 11.0% to 153.5 million pounds, creating what industry analysts increasingly call “a powder volcano ready to erupt.”

The 41% year-over-year inventory increase to 299.3 million pounds represents approximately 90 days of domestic consumption—far exceeding healthy balance levels. Even more troubling, NFDM shipments collapsed by 13.4% compared to January 2024, creating a perfect storm of overproduction and underconsumption.

“Processors appear to be ignoring flashing warning signs in the powder market,” warns industry economist Maria Rodriguez. “With flat or weakening demand from Mexico and reduced interest from other international buyers, these inventory levels create downward price pressure that will only intensify as we approach spring flush.”

This inventory mismanagement becomes more significant given imminent trade disruptions with Mexico, America’s largest dairy export destination. Adding to market pressures, the sharp decline in skim milk powder production (37.6% to 35.5 million pounds) indicates processors may be abandoning products specifically formulated for international markets just as trade tensions escalate—a concerning strategic pivot that could damage hard-won market relationships.

Whey Complex Shows Mixed Results

The whey sector presented contradictory signals in January that further highlight processor indecision. Total dry whey production decreased slightly by 1.9% to 76.2 million pounds compared to January 2024, despite increasing cheese production that would typically generate more whey. This suggests potential processing constraints or strategic decisions to limit whey production amid uncertain markets.

More notably, whey protein concentrate (WPC) production fell sharply by 10.4% to 38.2 million pounds, with the WPC 25.0-49.9% category plummeting 17.6%—reaching record low production levels for January. Despite this production decline, WPC stocks decreased marginally by 3.6%, suggesting weakening demand across domestic and international channels.

Conversely, whey protein isolate production increased substantially by 19.9% to 17.1 million pounds, suggesting manufacturers focus on higher-value protein products. Meanwhile, WPI stocks decreased 5.7%, indicating that demand for these specialized products remains relatively robust.

Strategic Implications for Dairy Farmers

The January production data demand strategic responses from dairy producers facing these market dynamics. The disconnect between component-adjusted milk production increases (2.2%) and finished product growth rates suggests processors struggle to balance milk utilization against fragmented market signals efficiently. This challenge ultimately transmits financial risk back to the farm level.

Farmers should consider several proactive measures:

1. Review component optimization strategies, particularly evaluating the ROI on protein-enhancing feed additives, given the weakness in American cheese production and strength in Italian varieties.
2. Contact processors directly to understand their production plans during the upcoming spring flush period and align herd management accordingly.
3. Evaluate milk marketing contracts to determine flexibility for directing milk to processors with more diversified product portfolios that are less dependent on NFDM.
4. Implement voluntary production moderation during peak spring months to avoid contributing to already excessive powder inventory build-up.

Farmers must recognize that the traditional price signals from CME markets may be increasingly disconnected from actual product movement and inventory positions. The January report demonstrates that even as cheese and butter prices show relative strength on paper, the underlying supply-demand fundamentals suggest potential pricing corrections once inventory realities fully manifest in market prices.

Conclusion: Market Reality Check Needed

As the dairy industry navigates these complex production and trade dynamics, the approaching spring flush threatens to exacerbate already significant challenges. The traditional seasonal increase in milk production could trigger substantial price corrections unless processors realign production plans with market realities rather than continuing to build inventory positions that defy economic logic.

For dairy farmers, these production trends underscore the urgent need for greater transparency and coordination across the supply chain. The divergence between component-adjusted milk production increases and finished product growth rates suggests a processing sector struggling to allocate milk components efficiently against fluctuating demand signals. This challenge ultimately transmits financial risk back to those producing the milk.

LEARN MORE:

• How Mexican Tariffs Could Reshape U.S. Dairy Export Strategies in 2025
• Federal Order Reform Implementation: What Dairy Farmers Need to Know
• Managing Component Optimization in an Uncertain Market

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