Demand for dairy protein is running strong in the U.S. and around the world, and that provides opportunities — and challenges — for the U.S. dairy sector, according to CoBank’s outlook report for the year ahead.

The U.S. ranks third globally among dairy product exporters, right behind the European Union and New Zealand.

But efforts to curb climate change and the impacts of methane and carbon dioxide production are limiting dairy herd growth in the EU and New Zealand. In addition, growth in New Zealand is limited by land availability.

“As a result, domestic and international dairy processors have turned to the U.S. for future dairy growth opportunities. The U.S. will see an unprecedented $8 billion in new dairy processing investment through 2026,” said Corey Geiger, CoBank lead dairy economist.

More milk

Some of those plants are poised to go online in 2025 with about half of the investment in the cheese category. Three major new cheese plants in the Central Plains and Texas Panhandle will require nearly 20 million pounds of new milk per day by mid-2025.

As cheese production ramps up, so will whey production, and the surge in new cheese and whey products will likely place downward pressure on dairy product prices in the second half of the year.

“A confounding factor would be any retaliation from potential tariffs placed on major dairy export customers such as Mexico and China,” he said.

Where the new milk will come from to fill plant expansions is a looming question as 2023 and 2024 will be the first back-to-back years since the late 1960s that U.S. milk production took a downturn, he said.

Replacement heifers

Dairy replacement heifers ready to enter the milking herd are at a 20-year low, and prices for those heifers have vaulted from $1,600 just 18 months ago to well over $3,000, he told Capital Press.

“This situation will put a cap on growing milk production nationwide,” he said.

U.S. dairy farmers did buy 7.9 million units of beef semen in 2023 — to take advantage of premiums on beef-on-dairy calves — but it will be at least two to three years before the tide turns on replacement numbers, he said.

Some of the milk needed to fill the new plants will come at the expense of dryer utilization, limiting nonfat dry milk and skim milk powder production, he said.

“The long-term retail and food service forecast indicates that cheese and whey proteins will be the long-term growth category,” he said.

Strong demand

That’s the reason $4 billion of the $8 billion plant investment is focused on cheese and whey. Snacking cheese and high-end whey proteins have a strong demand trajectory. In addition, nonfat dry milk is a lower margin product, he said.

On the flip side of the milk supply issue, higher component levels in farmgate milk, largely butterfat and protein, have lifted product yields. Cheese and butterfat yields improved by 11% and 13%, respectively, over the past decade, he said.

“As for margins to make milk, given the lower cost of grain and feedstuffs in over five years, U.S. dairy farmers have a great opportunity for solid returns. Solid margins and the higher price forecast for milk provide dairy farmers an incentive to buy feed additives to produce more milk per cow,” he said.