Liquid milk production grew 1.7% in July, the slowest pace since March 2025. While the milking herd grew 1.9% from a year prior, heat stress and wildfire smoke contributed to a slight decrease in milk output per cow. Dairy markets are still showing signs of tightness in skim solids. Nonfat dry milk prices revisited the $2.10s in late September as domestic use increased amid limited supplies, and dry whey prices remained elevated as more of the whey stream is diverted into whey protein concentrates. Butter and cheese tell a different story, however. Domestic demand for butter has been robust, but production growth has outpaced domestic use. Circana data indicates that summer retail sales of cheese have slipped as inflation tightened consumer budgets. Despite strong export volumes for both products, strong production is limiting price upside.

Signs of increased economic pressure on producers are growing. Feed costs are rising as drought took a toll on crop yields. Elevated diesel costs are increasing hauling charges, and increasing interest rates and bond yields are likely to increase the cost of borrowing. DMC margins fell to $9.93/cwt in July as feed costs increased and the All-Milk Price eased slightly. As feed costs rise, DMC margins are expected to fall below the $9.50/cwt maximum payment threshold from September through December.