Dairy's new profitability formula: Components, beef and managing risk

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Insights from a Dairy Stream conversation with Dr. Megan Roberts, Agricultural Economist at Compeer Financial

In a recent episode of Dairy Stream, host Joanna Guza sat down with Dr. Megan Roberts, Agricultural Economist at Compeer Financial, to discuss the major economic forces shaping today's dairy industry. As a proud partner of Dairy Stream, Compeer Financial brought a valuable perspective on topics ranging from milk components and milk check analysis to beef-on-dairy opportunities, risk management strategies and the market trends producers should be watching through 2026 and beyond.

Below are some of the key takeaways from the Dairy Stream episode.

Components are driving the dairy industry

If there is one headline that defines modern dairy economics, it's simple: components matter more than ever.

Over the past decade, dairy producers have significantly increased butterfat and protein levels in milk. Today, milk solids average roughly 9.1% protein and skim solids and approximately 4.25% butterfat, representing a substantial shift from historical levels.

This trend has been fueled by both genetics and consumer demand. As demand for protein-rich dairy products continues to grow, farms that focus on producing higher-value components are often seeing stronger returns.

"The conversation has shifted from how much milk a herd produces to how many pounds of butterfat and protein they're shipping," Roberts said.

For many farms, these component gains have become critical contributors to profitability.

Dairy farms are becoming multi-commodity businesses

Historically, dairy farm financial performance was closely tied to milk prices. Today, dairy operations are increasingly viewed as diversified businesses with several important revenue streams.

In addition to milk, producers may generate income from:

• Milk components
• Beef-on-dairy calves
• Cull cow sales
• Renewable energy projects
• Other diversified enterprises

This diversification creates additional opportunities for profit while helping reduce reliance on a single commodity market.

"Dairy farms aren't just selling milk anymore," Roberts explained. "Beef is no longer a byproduct. It's become a true enterprise and revenue stream."

While diversification can improve resilience, it also introduces additional complexity. Producers must now manage both dairy and beef market cycles while making decisions that balance short-term opportunities with long-term herd goals.

Three milk check metrics every producer should watch

When evaluating a milk check, Roberts believes producers should focus on three critical measurements:

1. Pounds of butterfat shipped

Butterfat remains one of the most valuable drivers of milk revenue. Tracking butterfat production provides insight into how effectively a herd is capturing component premiums.

2. Pounds of protein shipped

Protein demand has remained exceptionally strong, making protein production another key measure of herd performance and profitability.

3. Net milk revenue

Rather than focusing solely on announced class prices, producers should carefully evaluate their actual net milk revenue after:

• Component premiums
• Quality bonuses
• Hauling costs
• Marketing fees
• Other deductions

"The class price alone doesn't tell the whole story," Roberts said. "What's important is understanding what you're actually being paid for at your creamery."

Aligning herd performance with the premium structures offered by a processor can play a major role in improving margins.

Looking beyond the milk check

Today's profitability analysis extends beyond milk revenue.

Producers should also account for:

• Beef-on-dairy calf value
• Cull cow value
• Breeding decisions
• Replacement heifer economics

These factors have become increasingly important as beef markets have strengthened.

"When evaluating profitability, it's not just about what's on the milk check anymore," Roberts noted. "The value of calves and cull cows has fundamentally changed the economic picture."

Beef-on-dairy continues to create opportunity

One of the most significant developments in dairy economics has been the rise of beef-on-dairy programs. Strong beef demand, combined with a historically tight national cattle herd, has created exceptional calf values for dairy producers.

Roberts noted that some day-old beef-cross calves have sold for as much as $2,200, levels that would have been difficult to imagine even a few years ago.

"This has become a substantial source of revenue for dairy farms," she said.

Although commodity markets eventually move toward more balanced pricing, ongoing cattle inventory challenges, weather impacts and disease concerns have extended the current cattle cycle longer than many economists initially expected. As a result, beef-on-dairy opportunities may continue to support dairy farm profitability in the near term.

Risk management is more important than ever

With multiple revenue streams and fluctuating commodity markets, risk management has become a critical part of farm strategy.

Roberts emphasized that there is no single risk management approach that works for every operation. Instead, producers should develop a plan tailored to their individual goals and risk tolerance.

Many farms are utilizing tools such as:

• Dairy Revenue Protection (DRP)
• Margin protection programs
• Livestock insurance products
• Traditional hedging strategies

Today, approximately 25% of U.S. milk production volume is protected through Dairy Revenue Protection programs, illustrating how rapidly adoption has grown over the past decade.

The key, Roberts says, is simply having a strategy in place.

Replacement heifers: The next big question

As beef-cross calf values remain strong, some producers are reevaluating replacement strategies. Should they sell valuable beef-cross calves today or invest in raising future replacement heifers? The answer depends on each farm's long-term goals.

Producers looking to expand may place greater value on retaining replacements, while others may prioritize near-term cash flow opportunities.

Roberts encourages farms to regularly evaluate whether they have enough replacement heifers in the pipeline to meet future herd objectives.

What to watch in 2026 and beyond

Looking ahead, several key factors are shaping the dairy outlook:

Components and consumer demand

Protein demand remains exceptionally strong, supporting premiums and influencing milk pricing structures.

Milk production growth

Large dairy herds and continued production gains may place pressure on milk prices and margins.

Beef market dynamics

Tight cattle supplies continue supporting calf and cull cow values, although markets will eventually return toward more traditional cycles.

Trade and USMCA

Exports remain critical to dairy demand, with more than 17% of U.S. dairy production moving into international markets. Ongoing reviews of the United States-Mexico-Canada Agreement (USMCA) will be important for maintaining access to key export destinations.

Final thoughts

The modern dairy industry is evolving rapidly. Success is no longer measured solely by milk volume or class prices. Instead, profitability increasingly depends on a producer's ability to maximize components, capitalize on beef-on-dairy opportunities and effectively manage risk across multiple revenue streams.

As Roberts summarized throughout the discussion, today's dairy farm is more diversified, more complex and potentially more resilient than ever before. Those who understand these changing dynamics will be best positioned to navigate the opportunities and challenges ahead.