Agriculture policy is set at a point in time while market conditions keep changing, and over time the two can drift apart. Progressive Dairy Editor Jenn Coyne spoke with University of Wisconsin agricultural economist Leonard Polzin to discuss the relevancy of the Dairy Margin Coverage (DMC) program in today’s evolving U.S. dairy market.
The Dairy Margin Coverage program has historically served as a relatively good risk management tool for dairy operations. Is that still the case?
POLZIN: In the policy landscape, you get two choices; either you can be simple and uniform, or it can be complex and individualized. DMC chose to be simple and uniform, which means that when you get to the on-farm side of things, it's going to be less representative. There's going to be gaps and as this dynamic market happens, those gaps become more apparent. Still, mathematically, it’s probably the best risk management tool dairy has ever had from what producers have paid in versus what they've received. It's structurally designed for smaller operations, and it does so without excluding larger producers.
How has the dairy landscape evolved for some to say the program hasn’t kept up with the true cost of making milk?
POLZIN: One of the topics being discussed is that the DMC formula uses the all-milk price. But the question then becomes: Do we want to use an average mailbox price for the entire U.S.? That would get us closer, but you're still going to have regional disparity. Do we want to do mailbox price by regions? Again, you'll be closer, but there's some disparity. And even within a region, no two farms are alike, so any average still leaves a gap between the formula and what a single operation sees.
On the feed cost side, the first question is how representative the ration is. It is really a price index built on a fixed set of commodity feeds, and the implied ration sits between what a milking cow eats and what a whole farm feeds, so it is hard to say cleanly whether it runs high or low. There is a push and pull: Making it more representative by working in home-grown feeds, like corn silage, tends to calculate a lower cost, not higher, which works against the producer. The formula also captures only raw ingredient prices, not the cost of mixing and fortifying a feedable ration. And higher fertilizer costs raise what it takes to grow corn, while the formula runs on the market price of corn, which may never reflect one farm's higher costs. It is not just a timing lag; the program can miss that increase entirely.
Also, over time, we don't see non-feed costs swing the way feed costs do; they mostly just move in one direction, up, things like labor, insurance, taxes, veterinary expense, energy, repairs, hauling, supplies. What's happening is that the program only measures income over feed cost. It never tracked non-feed costs, and those have climbed into the cushion the coverage level originally left for them. If you take that in conjunction with a mailbox price difference, you could easily be $1 to $2 off your actual cost.
Leonard Polzin. Courtesy image.
What market conditions favor the program and which ones create a hindrance for those enrolled?
POLZIN: The program is more responsive to milk price than it is to feed cost hikes. It does seem to trigger payments more often when the milk price is weaker and sustained with very significant downturns in the market.
What makes this current dairy market unique compared to what we’ve seen before?
POLZIN: We have this very large investment in processing taking place over the U.S., and I think that'll be a big issue where class, utilization and geography are going to come into play a lot and where people's overall satisfaction is with the program. We're essentially compressing what might have been 10 years of processing investment into about five years. And it reverses the usual order. For most of dairy's history, milk production expanded first and processing followed. This time processing is leading, and a shift like that works its way through the relationships and structures the industry was built around. The adjustments that follow are likely to be significant, and some will be hard to anticipate.
How can producers make the most of this program and other risk management options given the forecasts for the remainder of 2026?
POLZIN: I always tell people that at the beginning of the year, they should go to their processor and ask them specifically: What products are you making and where is it being sold? Then you can figure out where your exposure is and where your risk is on your milk check price.
And ask yourself, how long are you able to survive if things go down? Do you have something in place for that? Even though our numbers on paper look historically good, there are a lot of guys out there where it is really tight when we really start breaking down costs.
