Monthly Dairy Market Update - August 27, 2026
Margins Hit from 3 Directions
Even though on-farm margins vary, the Dairy Margin Coverage (DMC) calculation remains a useful benchmark for farm-level health and gauging whether the U.S. milk supply is likely to expand or contract. Through June, the 2026 DMC margin averaged $9.65/cwt. On top of that, the return of dairy-beef cross, calf, and cull cow values has added $3-5/cwt. to farm receipts. Farm income in the $12.65 to $14.65/cwt. range explains why 2026 U.S. milk production through July was up 2.75% compared to the same period a year ago. Like all good things, though, strong margins could be coming to an end. Rising feed costs, softening beef values, and a flat cheese market have combined to produce a very different outlook for the balance of this year and into 2027. The outlook now points toward regional contraction and a slower pace of production growth next year
While the nation’s dairy cows appear to have weathered July’s heat and humidity, the nation’s crops may not have fared as well. Corn futures pushed above $5/bu. for the first time in 18 months. The midAugust crop tour noted that corn in Nebraska, western Iowa, and Illinois was in worse shape than expected. Add to that a corn crop in France that could be the smallest since 1980 and continued unrest in the Red Sea, and the market has grown considerably more pessimistic about global supply. This pessimism has been enough to lift the feed costs used in DMC calculations from roughly $10/cwt., the average of the past two years, to more than $11.37 based on futures prices as of Aug. 24. The $1.37 increase erodes farm margins dollar for dollar and arrives without any offsetting increase in the milk price. Based on current futures prices, the 2027 margin forecast sits below the average for each of the past three years.
U.S.-Canada Trade War On
The United States and Canada have called off trade negotiations, and a trade war is now underway. Canada released its counter-tariff list, which includes cheese, fluid milk, cream, and whey. The higher duty will begin Sept. 8, 2026. Nonfat dry milk markets came roaring back in August, with futures forecasting prices in the $1.60s and $1.70s again. Whey futures prices have also moved higher and are now above 70¢ per pound from the fourth quarter forward due to more whey solids moving to whey protein concentrate production.
... cheese increasingly dependent on exports
Cheese is the key driver of milk prices, accounting for roughly half of all U.S. milk produced. The sheer volume of manufacturing capacity that has been added over the past two to three years has meant that the domestic cheese supply has been more than sufficient to meet domestic needs. The U.S. dairy industry now produces 66 million more pounds of cheese per month than it did in 2024, and domestic demand growth has not come close to absorbing this growth. Exports have absorbed more than half of this new output, making domestic prices more dependent on foreign buyers.
Cheese’s reliance on exports can also be seen in Chicago. This year’s trading volume for 40-lb. Cheddar blocks at the CME has exceeded 36 million pounds through Aug. 25, a pace that could near 55 million pounds for the year, rivaling last year’s trading volume. In the past, a strong export year similar to 2026 would have pulled cheese away from the exchange, but two things have changed. Manufacturing capacity for 40-lb. blocks has been growing incrementally and sales of shredded cheese, the primary domestic use of block Cheddar, have been shrinking. Combined, this has resulted in a steady stream of cheese arriving in Chicago and a price that will not move. Cashsettled futures in late August were still indicating that prices would rise into the fall, yet the spot market has struggled to hold the low $1.60s for more than a week at a time. For perspective, the Aug. 25 settlements for the October and November 2026 cheese contracts would be the lowest for those two months since 2018.
The third leg is beef. The U.S.-border reopened at a sole crossing in Arizona this month, with a New Mexico crossing expected to follow in the next 30-60 days. More cattle from Mexico should provide relief to U.S. packers and could explain why calf prices are moderating. Beef calf values have reportedly dropped from $1,700 to $1,200/head, and dairy calf prices have fallen below $1,000 for the first time in a while. Cull cow values will likely follow. If the value of an older cow’s calf and milk have declined, she soon becomes a candidate for the slaughter truck.
Margins are being squeezed from three directions, with the supplemental income of the past two years fading as feed costs climb. Regional contraction will likely follow. For buyers, supply will likely be comfortable through fall then tighten into spring. That said, contraction always seems to take longer to arrive than anyone expects.
Ken's Corner
by Ken Meyers President, MCT Dairies Inc.
The newly sparked trade war between Canada and the United States couldn’t have come at a worse time for dairy. With dairy both a sticking point in the failed negotiations between the two countries and on the list of U.S. products slapped with retaliatory counter-tariffs from Canada, the dairy industry will need to look for new export markets or hope for a surge in domestic sales. Starting the day after Labor Day, U.S. cheese and curds will face a steep 25% tariff, with milk, cream, milk powders, and whey protein concentrate (WPC) slapped with as much as a 50% tax.
If history is a guide, Canadians will not be purchasing as much U.S. dairy as they did before the trade war began, due to the newly inflated prices as well as Canadian pride. Canada’s counter-tariffs will affect up to $20 billion in U.S. annual exports, of which about $1.3 billion are dairy products.
While the U.S. dairy industry responded positively to the Trump administration’s use of tariffs to eventually resolve outstanding trade issues, including long-standing dairy market access issues with Canada under the U.S.-Mexico-Canada Agreement (USMCA), the short-term result is bound to be a decline in demand for U.S. dairy.
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The information contained in this newsletter is for general guidance only. It is not intended to constitute or substitute investment, consulting or other professional advice or services. The information presented is not an offer to buy or sell commodities. Compass accumulates then distributes opinions, comments and information from and based upon other public and reliable sources, but it cannot warrant or guarantee the accuracy of any of the data included in the newsletter. From time to time, MCT Dairies, Inc. may hold futures positions in commodities discussed in the newsletter. Always contact a registered financial advisor before making any decisions. MCT Dairies, Inc. shall not be held liable for any improper or incorrect use of the information contained in the Compass or for any decision made or action taken in reliance on the information in this newsletter. Reproduction with permission only.