State level milk supply and demand are modeled on a monthly basis to examine expected payments, government loss ratios, and economic welfare implications of margin insurance programs, both with and without supply controls, in the U.S. dairy industry. A technique is developed to properly calibrate a spatial econometric supply and demand system utilizing instrumental variables to model correlated input and output prices at both the state and national levels. Supply controls are found to improve producer surplus at the expense of consumer surplus and overall economic welfare, in expectation costing the U.S. economy an estimated $105 million per month. Rather than interfering with supply in the market, margin insurance program savings could more efficiently be generated by increasing premiums. Adverse selection can be more properly managed by basing premiums on market expectations and current conditions, as opposed to codifying premium levels for the life of the program in the legislation.