Mixed signals make for rough markets

From disappointing milk futures to new processing investments and potentially shifting export markets, 2026 is greeting dairy farmers with a wave of uncertainties.

Leonard Polzin, dairy markets and policy outreach specialist with the University of Wisconsin Division of Extension, recently shared his insights with producers during two presentations: Jan. 12 on the I-29 Moo University webinar series, and Jan. 13 on the Professional Dairy Producers’ Dairy Signal program.

“In dairy, you buy retail and sell wholesale, so capturing the margin in there is no small feat,” Polzin said. “Dairy has never been easy. … 2026 is going to be no exception, but I think there might be some room for those operators that are dialed into looking for opportunity.”

Much of the uncertainty facing the dairy industry in the coming months comes from a shift away from historical norms, Polzin said.

“There is this overall theme happening here in the first part of 2026 that we’re getting a very big supply-led adjustment in the dairy space in the U.S.,” Polzin said. “Historically, milk production has led supply growth. If you look over the past 20 or 30 years and average it out, we saw about 1.5% growth per year in milk production, across the U.S., and then we would see about $1.5 billion in investment in processing to match that growth in milk production.”

Polzin said that much of that end product was typically utilized domestically, primarily as cheese. However, the industry is experiencing a shift.

“Right now, we’re seeing a large investment in the processing portion of our industry, some estimates have it up to $11 billion,” Polzin said. “Before, $2 billion (investment in processing) was a lot per year. So, we’re taking a very large amount of investment and condensing that down to a very short time.”

With the high level of investment in processing, Polzin said many may have expected an increase in milk prices because of a new demand for milk. What happened was something different, Polzin said. Instead, that new demand for milk was quickly met, with new product coming into the marketplace.

“As new products come online, the market has to clear that until we find this new normal in price ranges, to find where that equilibrium is for those new products coming out,” Polzin said. “The whole supply curve has shifted out, so we’re trying to discover where our price points are along this new supply curve.”

Those changes send mixed signals to the market, Polzin said, leading to what could be a long period of transition. Risk management will become a priority in facing that transitory period.

The Dairy Margin Coverage program, one tool for risk management, was reauthorized through 2031 in the One, Big, Beautiful Bill Act, with the tier one coverage increased from 5 million pounds of production to 6 million. With enrollment, producers are now able to update their production history, based on the milk marketed from 2021 to 2023.

“It’s a valuable tool in your risk management toolbox, specifically because it doesn’t limit you from using other tools,” Polzin said. “Even if you don’t cover all of your production, I would say there are enough wild cards out there at the moment, that forgoing it wouldn’t be my recommendation. Just like insurance, you don’t want to have to use it, but if you do have to use it, it’s nice that it’s there.”

Polzin said using the data we have now to envision the long term may help farmers make management decisions today that can positively impact the next 3-6 years.

“Historically, when we saw milk production grow, it was based on margin,” Polzin said. “As you’re more profitable, you reinvest in your business (to) become more efficient. It’s very different now because it’s location and access to processing that is driving the expansion.”

Another change in the markets is the rapid increase in milk solids, Polzin said.

“Not only are we increasing our milk per cow, but also our component production per cow,” Polzin said. “When that happens, we need fewer cows … to be able to meet the demand for the new processing capacity. So, it’s like tugging two ends of the same rope — we need more cows, but at the same time we don’t need as many as before. So, it’s easy for us to overshoot that supply, especially in that short run.”

Exports are another mixed signal in the industry, Polzin said.

“We have excellent exports right now and we have excellent domestic demand and we’re moving a ton of product, but we’re not seeing this bump in price that historically we saw,” Polzin said. “Usually if we have great exports, we see some increase in price. That tells us that right now our exports are clearing markets, but at a discount versus giving us a premium in that cheese space.”

Much of the new processing investment being made will be going into cheese production, Polzin said.

“We have to move that (cheese) outside of our borders, whether that’s down south or overseas,” Polzin said. “If we continue to increase our production, we still have to clear all that product. The good side of that is whey production. The whey complex is adding a bump to that Class III space. The question is how long before we oversupply that?”

With uncertainties and volatility being the prevailing sentiments in the dairy sector early in 2026, Polzin said the future is just that — uncertain and volatile.

“I fundamentally hope everything I’ve said in these presentations is wrong, because if it is, I think we’ll all be better off,” Polzin said. “We’re just looking at the facts, figures, numbers and trends that seem apparent, but as far as long-term projection goes, who knows? But at least we can draw some insights and try to make some informed decisions now on the things we’re seeing and that might be coming down the pipeline.”