Volatility in Dairy Markets Calls for Risk Management
When it comes to dairy, Class III milk representing cheese and whey and Class IV milk featuring butter and milk powders are two cornerstones to milk pricing. Not only do these two categories price a significant portion of farmgate milk, the higher of Class III or Class IV in any given month sets the price for the highest value category- Class I fluid milk. So, it became concerning that Class III and Class IV milk futures spiraled downwards by $2 to $5 per hundredweight (cwt.) between August 2025 and January 2026 as the U.S. had a surplus of butterfat and milk production from its dairy cows.
Since then, more U.S. butterfat has been shipped overseas, and dairy cow slaughter is slowly ticking back up to help balance out supplies. Currently, the two major focus points for dairy farmers are keeping cows in the herd longer to produce more $1,600-plus beef-on-dairy calves and ramping up protein production to meet consumer demand.
It is critical during this era of volatility in dairy markets to hedge both revenue generation and expenses to protect margins. The Dairy Margin Coverage (DMC) program, for example, had a forecast for 10 of the 12 months in 2026 to have an indemnity payment sent during the trough of milk prices in January. Through early March, that forecast has shifted to only the first quarter of 2026 to deliver indemnity payments as futures markets rebounded. Although that is only one calculation with a rough estimation of milk income and feed costs, there are a variety of other factors to consider when looking at an entire operation to best prepare for future “black swan” events that cause the markets to shake things up.
On the bright side, dairy is well-positioned with consumers looking for healthy, tasty, convenient, and of course, high-protein options. Feed stocks appear stable as well after record-large crop harvests in the U.S. and Brazil. Finally, the beef-on-dairy movement is a long-term trend that has strong momentum. Prices for beef-on-dairy calves are expected to remain elevated over the next couple of years due to contracting beef supplies and exceptional demand for beef. These key items, along with the $12 billion in dairy processing investments across the U.S., have put the dairy industry in a strong position to do well in the near- and long-term.