- Milk prices remain flat heading into 2026, with no clear sign of a sustained recovery as strong supplies keep buyers on the sidelines.
- Milk production continues to climb, driven by larger herds, higher output per cow and incentives from strong beef-on-dairy calf prices.
- Demand is steady but not strong enough to significantly reduce inventories, keeping pressure on margins despite solid cheese and butter exports.
Dairy producers don’t need a futures chart to know conditions are challenging. Milk prices have leveled off, margins remain tight and the outlook offers little sign of quick improvement. According to dairy analyst Robin Schmahl of AgMarket.net, the industry is likely heading into another tough year without a clear driver for stronger prices.
Looking at the price structure, Schmahl says the market is basically flat out through the first quarter of 2026. What troubles him most is not just the level of prices but the lack of urgency from buyers.
“The buyers of cheese, buyers of butter and dairy products are not concerned about supplies,” he says. “So, they don’t have to be aggressive. They can just wait. That’s the bottom line.”
Milk supplies are abundant, and that’s weighing heavily on prices. Production continues to climb, with more cows in the herd and higher output per cow, leaving the market well-stocked and buyers in no rush to secure more milk.
“On the last milk production report, we’re running 3.7% higher than the previous year,” Schmahl notes. “We’ve got over 200,000 more cows, and those cows are producing around 20 lb. of milk more than last year. We have a lot of milk.”
Demand is Good, But Not Good Enough
On the demand side, the picture is more complicated. Cheese and butter markets have held steady and exports are providing some support, especially with U.S. prices remaining competitive globally.
However, even with these positives, demand isn’t strong enough to make a meaningful dent in the large milk surplus. Domestic consumption is steady rather than growing, and while exports help, they can’t fully absorb the extra supply that continues to build.
“Cheese demand has been steady and even picked up a little,” Schmahl says. “International demand is very strong and holding well, largely because U.S. prices remain lower than world prices.”
Butter tells a similar story.
“Butter plants are running seven days a week,” Schmahl adds. “Cream supplies are very large, and world butter prices are about a dollar higher than U.S. prices. That price gap has fueled strong butter exports.”
However, global signals aren’t offering much optimism. The Global Dairy Trade auction, which tracks international dairy prices, dropped another 4.4% in its latest update. That’s the ninth decline in a row, showing buyers around the world are pulling back. This means lower global prices make it harder to sell milk overseas and harder for the domestic market to work through the extra supply.
Even positive developments, like the return of whole milk to school lunch programs, are unlikely to be game changers near term. Still, Schmahl calls it “real positive news,” noting that when whole and 2% milk were removed in 2012, “consumption in the schools went down because students didn’t like the skim and 1%.”
“It’s looking like it will be a lower year price wise,” Schmahl adds. “Demand exists, but not at levels that can chew through inventories and turn the price tide.”
Why are Butterfat Premiums Disappearing?
Processors are changing their priorities when it comes to milk components. For years, farmers focused on breeding and feeding strategies to boost butterfat because it was in high demand and paid well. Now, processors are pulling back, and the premiums for higher butterfat have all but disappeared.
“We’ve seen record butterfat production for about a year,” Schmahl says. “For a long time, processors encouraged higher fat levels. Now they’re capping it — anything over 4.5% they’re not going to pay for.”
This cap affects producers who have invested in genetics, crossbreeding and feed strategies to increase milk components.
“What producers have worked toward for years is now becoming a disadvantage,” Schmahl says. “It seems like processors expect cows to adjust instantly, but that’s not realistic.”
This change takes away one of the few tools producers had to earn more for their milk without increasing output.
Is Beef-on-Dairy Changing the Game?
Even though the market doesn’t need more milk, dairy cow numbers continue to see an increase. One reason is the growing beef-on-dairy trend, which has changed how producers make culling decisions. Strong calf prices have created an incentive for farmers to keep cows that might otherwise be culled.
“We do need more beef,” Schmahl adds. “That demand pushed calf prices higher, which in turn drove up heifer prices, so dairy farmers have started to think differently. Instead of buying a $4,000 replacement heifer, they could keep a cow that produces less milk, breed her to a beef sire and sell the calf for around $1,000. Plus, that cow will produce another calf down the road.”
He describes the beef-on-dairy trend as a modified Black Swan event. While it hasn’t appeared suddenly, it’s still unprecedented for the industry. Because there’s no historical model to draw from, analysts are finding it difficult to predict its long-term impact on herd management and milk supply.
That uncertainty is part of what makes the current cycle so tricky. As long as a 3-day-old beef-on-dairy calf can fetch $800 to $1,000, producers have a strong incentive to hang on to older, lower-producing cows. The result is elevated cow numbers that keep milk flowing even when milk price signals would traditionally force a contraction.
Risk Management in a Flat Dairy Market
Schmahl says the biggest risk many dairies are taking going into 2026 is doing nothing.
“Producers don’t want to do anything, because they think we’re at the low,” he says. “It may stay here for a little bit, but the upside potential is there. I’m concerned … about what could happen in the first quarter, or maybe first half of the year if our production trajectory follows what it is.”
On milk price protection, Schmahl favors options over DRP at current levels.
“I firmly believe that a put option strategy is the best way to go,” he said. “With Dairy Revenue Protection (DRP), you automatically give up about 5% of your insured price —usually around 80¢. That means your floor starts lower than the current market.”
By comparison, he says a well-structured option plan can keep your protection closer to today’s price. On inputs, Schmahl advocates taking advantage of relatively cheap corn and soybean meal.
“You’ve got a lot of year ahead — to just guess the market is not a good way to manage risk,” he adds.
Pressure Persists, Opportunities Remain
Looking ahead, 2026 is shaping up to be another challenging year for dairy. Milk supplies remain strong, and prices are expected to stay under pressure, leaving producers with tight margins. However, there are still some bright spots.
Export demand for cheese and butter continues to provide support, and U.S. prices remain competitive globally. Domestic programs, like the return of whole milk to school lunches, could help boost consumption over time.
While the market isn’t signaling a quick turnaround, disciplined risk management and careful planning can help producers navigate the year ahead and position themselves for opportunities when conditions improve.