Dairy farmers could see margin protection payments as soon as this month as rising feed costs squeeze profitability, making the next few months critical for locking in risk management strategies.
"September, October and November could see potential [Dairy Margin Coverage] payments," said Andy McCarty, dairy business adviser for Land O'Lakes, speaking at the annual Dairy Financial and Risk Conference. "There is a lot of volatility out there."
With that volatility comes opportunity, but only for farmers who understand the expanding toolkit of margin protection programs now available.
McCarty said the first step for producers is an obvious one that is often overlooked: knowing cost of production.
“You've got to know where your breakevens are, because if you don't know what your breakevens are — more specifically, Class III and Class IV breakeven — how are you going to know if the market price is a good price or a bad price?” he said.
Options toolkit
Dairy Margin Coverage (DMC) pays an indemnity whenever the average monthly dairy margin — the difference between the U.S. all-milk price and average feed costs — falls below a coverage level chosen by a producer.
“That is the umbrella,” McCarty said. “Every single producer should be signing up for that product.”
Last year’s One Big Beautiful Bill made significant changes to the program. Arguably, the biggest change was allowing dairy farmers to update their production history.
So, if a farm started marketing milk on or before Jan. 1, 2023, they would use the higher-of milk marketings of 2021, 2022 or 2023. New dairy farms starting after Jan. 1, 2023, would use their first year of monthly milk marketings, even for a partial year.
The next sign-up period for DMC is expected to open early next year. January and February were the last months that enrolled farmers saw an indemnity payout, but with rising feed costs, McCarty expects more indemnity payments this fall and into next year.
“That’s unfortunate, and I say unfortunately because DMC paying out is not good for the market,” he said.
Dairy Revenue Protection (DRP) is designed to protect farmers against unexpected drops in quarterly revenue from milk sales. It uses futures market prices (Class III and Class IV milk prices) and regional or state production data to set a revenue target. If actual regional milk revenue falls below a farmer’s chosen revenue guarantee, an indemnity is paid out.
“So, this is what I want people to realize: This is a floor product, meaning you're setting the floor for your milk production, and then you get all the upside,” McCarty said.
LGM-Dairy (Livestock Gross Margin — Dairy) is designed to protect farmers when milk prices drop or feed costs rise. McCarty said it measures a farm’s margin by taking the market value of milk — Class III — then subtracting feed costs (corn and soybean meal). The program pays an indemnity when the actual margin falls below the guaranteed margin chosen.
Changes have been made to this program, too. The most important change is that it can now be used in conjunction with other programs, but not the same pounds of milk. For example, a farmer can use DRP for one specific quarter, but can apply LGM-Dairy to cover a completely different set of months or distinct production volumes.
Still, McCarty said it might not be a good fit for many Northeast dairy farmers.
“And I say that because it's only looking at the Class III price,” he said. “So, if it's just looking at the Class III price, you're leaving Class IV exposure out. Since we're in Federal Order 1 primarily, you're leaving that exposure to the Class IV market. So, it is a good program, I would say, more in the Upper Midwest.”
The newest tool, introduced in 2024, is Livestock Risk Protection, which allows farmers to set a minimum selling price for their animals without giving up the upside if prices go up. If the actual regional or national cash price index falls below a farmer’s chosen coverage price, the program pays the difference.
“What's kind of cool about LRP is, two years ago, it was introduced and you could have cull cow protection and unborn calf protection included in there,” McCarty said. “It was great timing in the dairy industry that this was introduced. Cull cow values were at good levels, heifer calf values were at good levels, and for beef cross calves, there was finally a product out there that can protect that.”
Futures and options are another tool, particularly for farmers who are comfortable with more complex strategies.
“This is for any of your dairy producers that love the numbers, that love digging in and really fine-tuning their risk management plan. You can do a lot with futures and options,” McCarty said.
How can they be used together?
McCarty said any of these programs work well individually, but the strongest protection comes from layering multiple tools, starting with DMC as a foundation, and then adding targeted coverage.
"Don't forget about feed," he said. "So often we get caught up in protecting the revenue side of the milk, we forget about the feed, and that's the No. 1 cost on dairy farms.
"Match the coverage to your breakevens, not just the cheapest product out there. You get what you pay for — the old adage.”
Timing is also factor. For example, the termination date for LRP coverage is Sept. 30, an extension of the previous deadline of Aug. 31 to allow producers to manage their coverage effectively.
For DRP, coverage is bought on a per-quarter basis — January to March, April to June, July to September or October to December — for up to five quarters into the future. Sales close and endorsements must be purchased 15 days before quarterly insurance period begins.
The Dairy Margin Coverage sign-up period opens in January with enrollment typically closing in mid-February.
"Markets are going to be what the markets are going to be. We can't change that," McCarty said. "But we can make a plan or put a plan in place to protect some of our margins or revenues."