CME Group butter prices plunged more than 40% from record highs in late-September to late October, and cheddar cheese prices fell 10% to 15% since September. Bellwether nonfat dry milk values tumbled 35% to 40% since March and most other dry products (except dry whey) are lower as well. But milk production is on the rise as dairy farmers are realizing good profits due to lower feed prices and strong milk prices.

As with most agricultural commodities, milk and dairy product prices are affected by a range of factors from input and transportation costs, domestic and export demand and global production and prices. For milk it’s even more complicated as the price many farmers receive for their milk is based on a formula that uses the price of cheese, butter, dry whey and nonfat dry milk, three of which remain above year-ago levels despite generally weak domestic and global dairy markets for the past several months. So as milk production has been increasing, farmers at the same time have been receiving more per hundredweight for their milk and paying less for feed, a clear recipe to boost production.

Year-to-date milk production through September in the 23 major milk producing states was up 2.2% from the same period last year, according to U.S. Department of Agriculture data, but year-over-year production has been increasing at a faster rate as the year progresses, with first-quarter output up 1% from a year earlier, second quarter up 1.7% and third quarter up 3.5%. The largest monthly increase from a year ago was 4.1% in September. Monthly increases were the result of more cows giving more milk per cow.

“Production per cow in the 23 states averaged 1,804 lbs for September, 56 lbs above September 2013,” the U.S.D.A. said. “This is the highest production per cow for the month of September since the 23 state series began in 2003.”

When feed prices are low, dairy farmers adjust the amount and the mix of feed to maximize milk production.

In its latest World Agricultural Supply and Demand Estimates, the U.S.D.A. estimated 2014 milk production up 2.5% from 2013 and projected 2015 outturn up 3% from 2014, compared with an increase of only 0.3% from 2012 to 2013. While the U.S.D.A. expects milk production will continue to increase into 2015, it trimmed its forecast slightly in November compared with October as expansion of cow numbers and output per cow is expected to moderate.

A key factor pulling butter prices from record highs was a surge in imports in the late summer and fall. Prices for many U.S. dairy products have been above global values for some time, and U.S. exports have slowed, aided by the rising value of the dollar, which make U.S. products more expensive for foreign buyers. But the U.S.-world price relationship was significant enough to pull in butter (as well as more cheese) in recent weeks. U.S. butter stocks remain well below year-ago levels (down 37% from a year ago as of Sept. 30), and demand remains strong with the key holiday season approaching, which suggests prices may have little additional downside potential.

But analysts note cheese prices are the most critical component of milk prices, and cheese prices also have been at historic levels. Unlike butter, cheese prices have been more stable. CME Group cheddar prices topped out near $2.45 a lb in late September (the same time butter hit record highs, but price declines have been modest compared with butter and remain about 10% to 15% above year-ago levels, with some pressure also coming from rising imports. Cheese stocks are more in balance with demand (Sept. 30 stocks down only 5% from a year ago), keeping some semblance of stability in the market. The U.S.D.A. estimated the 2014 average price for Class III milk (used to make cheese and the largest of the four milk classes) at $22.55 a cwt, up 25% from the 2013 average of $17.99.

Cheese exports through September were record high, but the monthly pace was slowing. CME Group futures prices for Class III milk last week ranged from $16.60 to $17.50 a cwt for 2015, down from $21.60 nearby, and the U.S.D.A. forecast 2015 price average to range from $17.15 to $18.05 a cwt. The U.S.D.A. also expects lower prices for butter, cheese, nonfat dry milk and dry whey in 2015, which will mean lower milk prices if realized.

As a result, dairy producers will continue to see strong milk prices for the next few months, and thus will keep production strong, but the scenario may look a lot different a year from now.