Supply-led adjustment dominates dairy markets

Leonard Polzin University of Wisconsin-Extension

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BLOOMER, Wis. — Dairy markets continue to look depressed heading into the second quarter of 2026, according to Leonard Polzin, dairy markets and policy outreach specialist, University of Wisconsin-Extension.

“I hope everything I say today is wrong, to be honest with you,” Polzin said. “I don’t make the news, I just report on the numbers. I just do the math, look at the data and try to put it together to figure out what it’s telling us.”

Polzin spoke with dairy and beef producers March 27 at the Chippewa Valley Forage Council’s Spring Dairy and Beef Forage Seminar in Bloomer.

“A lot of what is happening right now is because dairy is in a supply-led adjustment,” Polzin said. “Historically, processors increased their capacity when our milk supply increased. Our milk supply increased when on-farm profits were high. That is not what we’re seeing right now.”

Unable to find any historical data or records that indicate this shift has ever taken place before, Polzin believes we have witnessed a change in the way dairy markets will operate.

“From the end of 2023 to mid-2024 is like the line in the sand,” Polzin said. “From there, going forward, in my estimation, every expansion that happens in the industry is going to happen because your processor said they can take more milk. That means who you ship to matters a lot.”

Polzin said producers are frequently seeing drastic variations in pay prices, from processor to processor.

“I think it’s likely we’re going to see huge variations in pay price because of the same reason we’re seeing big variations in processing capacity,” Polzin said. “All of these things are going to be increasingly disconnected from each other as we keep going forward — that your processor is going to determine if you grow or not. That also means we’re going to be very geographically dependent on where our growth happens.”

In the past, when milk production increased, it was generally a uniform increase across the country, Polzin said. That led to relatively uniform growth among farms.

“We kept adding cows all over,” Polzin said. “Milk production incrementally increased across farm size, across location. I don’t think we’ll ever see that again. The only places you’re ever going to see dairy increase in numbers is where the processors say they want more value.”

Polzin said this shift in the industry has implications that will impact more than just dairy farm growth.

“This matters because now all of our policy that is written for anything with dairy is hinged on this idea that there is market power on the side of the producer,” Polzin said. “If I’m right on this, that market power shifted. We need to look at how we do contracts, who will write state law. We are at the inflection point, the industry is fundamentally changing — good, bad or otherwise.”

The rate of consolidation could increase exponentially, because of this new dynamic on the processor side, Polzin said, and reverberations will be felt industry-wide.

“Historically, we have seen a $10 difference between the cost of production on dairy farms in Wisconsin, in any given year,” Polzin said. “It doesn’t matter if it’s a high-price or a low-price year; that $10 spread just moves with it. I estimate that we’re still going to see spreads like that, but we’re going to see income that is more variable, as well as cost of production that is more variable. As all these things become increasingly varied, distribution is probably going to widen on all things going forward. That means risk management is going to be harder. Everything gets more complex and difficult.”

In a market full of mixed signals, Polzin said it becomes difficult for producers to determine the best path for their operations.

“Some signals would historically tell you that you should grow, while some say you shouldn’t, all at the same time,” Polzin said. “It’s very confusing to sort out. The biggest thing that has changed everything is this investment in processing capacity that is happening across the entire U.S.”

According to Polzin, at least $12 billion in new processing capacity is entering the U.S. system over the course of 3-4 years, about $1 billion of which is happening in Wisconsin. Historically, the actual average for processing growth over the past 50 years has been $1.5 billion per year.

Historically, that investment has been made in cheese processing, Polzin said. Over the past 50 years, cheese consumption has been on the rise, while fluid milk consumption has decreased.

“It takes a lot more pounds of production to make cheese than it does to make fluid milk, so we were absorbing all of this into cheese,” Polzin said. “Domestically, we were consuming more cheese, so that rate of investment made sense.”

Conventional wisdom led people to believe milk prices would increase because of an increase in demand, as historical data would show. That has not been the case.

“Prices go up if the processor is short on milk,” Polzin said. “We have not been short on milk. When a new plant opens, the cows are there, the milk is there. That’s why we’re having a pretty good price pressure right now. Other countries are long on milk as well. There was no reason to have a demand for more milk.”

Polzin noted the increased processing capacity is happening in certain areas of the U.S. — in a “T” shape, east to west across the northern portion of the country, and north to south through the center of the country.

“That is where you saw cow numbers and milk production increase,” Polzin said. “If you’re not growing in capacity, you’re not growing in cows. As a processor, one is the optimal number of farms to work with to source milk. Where these expansions are happening, how many 80-cow dairies do you generally see? The dairies that are adding these cows, I don’t think any are under 3,000 pounds. If you’re a processor, you’re basically saying, ‘Hey we need this amount of milk, on this date — who’s going to do it?”

With the fundamental industry shift, Polzin said the forecast looks rough for the near future.

“Dairy is very asset-specific, when you invest in dairy, you invest in dairy,” Polzin said. “You aren’t just going to go raise chickens in your dairy barn. So even if milk prices are low, but processors said they need this much milk, there are guys who are going to invest in increasing their milk supply, while others will choose to hang it up. I hope I’m wrong, but I think this downturn could last longer than we’ve seen historically, which means we get a long duration of pain simply because we have so much asset fixity and investment.”