While farmers sharpen their margin pencils, dairy industry and USDA must do the same

EAST EARL, Pa. — The modern dairy cow is an economic powerhouse.

Compared with 2000, the average U.S. dairy cow in 2025 produced 34% more milk, 57% more butterfat and 42% more solids-not-fat (SNF). With only 2% more cows in 2025 vs. 2000, the U.S. produced 38% more milk and 62% more butterfat collectively.

Just think how much more volume and variety of products are produced today per hundredweight and per cow!

Here’s the reality check: After adjusting for inflation, the Dairy Margin Coverage (DMC) milk-revenue-over-feed-cost margin fell 27% per hundredweight when comparing the 2000-2012 average with 2013-2025.

Even all that added per-cow productivity wasn’t enough to make up the difference. Real DMC margin per average cow, when adjusted for inflation, fell 3%. This means to get ahead of the moving-average target means always striving to be above average.

Meanwhile, the number of licensed U.S. dairy farms dropped from roughly 111,000 in 2000 to 23,609 in 2025 — a 79% loss, or four out of five dairies.

More milk. More components. More technology. More value created from essentially the same national cow herd, but less real margin left on the dairy farm.

That raises an important question: Does the margin used for the Farm Bill’s dairy safety net, the Dairy Margin Coverage (DMC), adequately reflect the economics of producing milk from today’s productive cows?

USDA calculates the DMC margin. Your dairy has a margin too. They likely look  different. It’s essential to know the difference in order to work with the margin at both the farm level and on the USDA policy front.

Let’s start with the revenue side

USDA NASS describes the All-Milk price used in the DMC formula as a gross price before deductions for hauling, cooperative dues, balancing charges, fuel adjusters, stop charges and other marketing deductions.

In a 2024 email exchange, Farmshine dug in with some questions. The NASS reporter’s response put it plainly: “The All-Milk price is a gross price — not what dairy farmers take home.”

However, farmers pay bills with the net mailbox milk check, not the USDA NASS All-Milk price.

We also learned in that 2024 email exchange that the All-Milk price is designed to statistically represent all milk marketed in the U.S. — FMMO-pooled, non-pooled and organic milk — while the feed side of the formula reflects only conventional feed markets.

Organic represents a relatively small share of total milk production, but if organic milk prices contribute proportionately to the All-Milk price, shouldn’t the corresponding higher organic feed costs have some representation on the feed cost side of the margin? That’s a process question for the policy and statistical side of DMC.

Geography matters too

The monthly All-Milk price used in DMC is first calculated separately for each of the top 24 milk-producing states, with the national average weighted using each state’s prior-year milk production. Feed prices are likewise national measures weighted by prior year milk production per state, according to NASS.

As U.S. milk production shifts geographically, those weightings increasingly reflect where milk is growing fastest. That matters to traditional dairy regions where milk prices, feed costs, hauling, market utilization, and pooling behavior can look very different from rapidly expanding milk sheds. Is the DMC margin being dumbed-down to the point of declaring winners and losers?

Now, for the feed side

Today’s dairy doesn’t simply buy feed. It grows, harvests, processes, stores, and manufactures feed.

For example, corn silage is the foundation of most high-producing dairy rations, yet DMC represents corn silage and corn through the national corn grain price, which does not include the costs of putting digestible corn silage in front of today’s productive dairy cow.

Most dairies growing corn silage bear the same crop-production costs as a corn grower — land, seed, fertilizer, crop protection, fuel, labor and machinery — but there is no grain sale at the end to establish the cost of that forage. The crop must still be chopped, hauled, kernel-processed, packed, covered, fermented, stored, and eventually mixed and delivered to the cow.

Those purchasing corn grain contend with basis, and those growing it have costs of grinding, rolling, or steam-flaking.

Modern corn genetics and today’s high-producing dairy cow have also raised the bar for processing. Unlocking the starch and fiber needed to support today’s production requires kernel processing, horsepower, fuel, storage management, and attention to fermentation and shrink.

Then nutrients leave the farm every day in milk and livestock and must eventually be replaced in the soil.

These are not “little things,” and they add up. They are the cost of producing today’s hundredweight of milk and supporting today’s productive cow.

USDA’s own cost-of-production data show how differently costs hit, depending on herd size too. The squeeze is especially visible in the middle. Dairies milking 200 to 999 cows have already captured much of the biological efficiency of larger herds, but not all of their economies of scale. Feed costs are close, but the real divide is overhead with machinery, buildings, labor, and capital spread across fewer total pounds of milk.

USDA also finds profitable farms in every size category, which is an important reminder that scale influences overall category margin, but management still determines a great deal about what an individual farm can do with that margin.

Across all herd sizes, farmers have accomplished something remarkable with the dairy cow. Today’s average cow and each hundredweight of milk have changed dramatically, but even the relevant feed investments are not adequately reflected in the DMC milk-over-feed margin.

The average cow went from 18,197 pounds of milk in 2000 to 24,390 pounds in 2025. Butterfat production rose from 670 to 1054 pounds per cow, while SNF — protein, lactose and minerals — increased from 1587 to 2253 pounds.

That richer milk produces more cheese, butter, cream, whey ingredients, and other dairy products from each hundredweight compounded by the increased output of each cow. It creates value throughout the dairy supply chain and has helped support billions of dollars in new processing investment.

Farmers financed their side of that transformation through decades of investment in genetics, milk testing, nutrition, forage quality, herd health, reproduction, cow comfort, facilities and technology. They’ve indirectly financed the processing investments also through pricing conventions like the make allowance in FMMO minimum prices and loss of premium as well as new debits from milk checks.

So where is their economic return?

To get beyond the volatility of comparing individual years, we compared average conditions during 2000-2012 with 2013-2025, adjusting each year’s values to 2025 dollars before averaging them.

The average reported USDA All-Milk price rose from $17.12 to $19.65/cwt, a 15% nominal increase. In real purchasing power, however, gross milk revenue per hundredweight fell 1%.

Productivity rescued the revenue side on a per-cow basis. Producing substantially more milk and components lifted real gross milk revenue per cow by 22%.

But it did not rescue the margin. The inflation-adjusted DMC milk-over-feed margin fell 27% per hundredweight between the two periods. Despite producing 34% more milk per cow over the quarter century, real (inflation-adjusted) milk-over-feed margin per cow still fell 3%.

DMC itself does not measure the whole bottom line. It subtracts a standardized feed ration from a gross All-Milk price with all of the peculiar pieces described here. It does not subtract the full cost of growing and harvesting forage, nor labor, machinery, buildings, interest, hauling, marketing deductions and the other costs required to operate the dairy.

Think about what that means. Dairy farmers spent 25 years breeding, feeding, and managing cows to produce dramatically more milk and components to make dramatically more volume and variety of dairy products. The productivity gain was so large that it nearly overcame a 27% loss in real margin per hundredweight — but just barely because the farmer still ended up 3% behind on a per cow real milk-over-feed margin basis.

While the cow was accomplishing all of this, 79% of America’s licensed dairy farms disappeared. That’s not an argument against productivity. Productivity is one of dairy’s greatest achievements, and those investments helped dairy grow and remaining dairy farms of all sizes to have a means of improving in order to compete with herd-scale.

Instead, this an argument for understanding what that productivity has provided and what it has been required to overcome.

More milk. More fat. More SNF (protein). More technology. More capital. More value flowing through the dairy supply chain. Yet at the farm, less real milk-over-feed margin per hundredweight and less real margin per cow remained.

That’s the margin we don’t measure.

Risk management is different

Dairy farmers have also become more sophisticated risk managers. Programs such as Dairy Revenue Protection (DRP), and Dairy Livestock Gross Margin (LGM) can help protect against adverse milk-price moves. They are important tools, but they manage market risk, not the underlying economics of producing milk, not the structural margin.

DRP can protect expected revenue. It can help a farm survive volatility. But it cannot turn an inadequate underlying margin into a profitable one.

That is why DMC and private risk-management tools should not be confused. DRP asks whether milk revenue moved against the producer. DMC asks whether a standardized milk-over-feed margin deteriorated. Neither tells the farmer whether the whole dairy actually made money.

Dairy farmers can manage risk, but they cannot hedge-away a structural lack of margin. After all, a safety net triggered by a margin increasingly disconnected from the real margin farmers actually live with can look stronger on paper than it feels underneath the cows.

The lesson in 25 years of dairy economics isn’t that productivity doesn’t matter. Quite the opposite. Productivity is one reason thousands of dairy farms of all sizes have weathered extraordinary volatility and remained in business. But productivity by itself is no longer a financial plan.

The next gains may have to come from knowing the economics of each hundredweight as well as farmers knowing the cows that are producing it—what it costs, what it earns, where value is leaking out, and which risks can be transferred before the market moves against them.

With DMC changes largely settled for this Farm Bill cycle, USDA should take a hard look at whether the national formula still reflects the economics of producing milk today. The cow has changed. The feed has changed. The cost and pricing structures have changed. The measuring stick deserves the same reality check.

Farmers don’t have to wait for that review to begin measuring the margin that matters most: their own.

As dairy farmers sharpen their pencils, the dairy industry and USDA should be sharpening theirs also when it comes to debating future ‘make allowances’ and when it comes to ensuring the relevance of the true milk-income-over-feed margin that triggers dairy’s only safety net and one that farmers pay premiums in order to participate.