WASHINGTON—A Senate committee has agreed to extend the Milk Income Loss Contract program.

The Senate Appropriations Committee surprised some people in the dairy industry last week by approving a two-year extension for the program that pays dairy farmers when milk prices tumble.

If the House agrees to the measure, the program will continue through at least 2007 and pay farmers more for every 100 pounds of milk. Lawmakers also agreed to lift restrictions on multifamily or multigeneration farms.

The program pays farmers when market prices for milk used in beverages falls below $ 16.94 per 100 pounds. With the extension, the target price would climb to $ 17.10. Farmers are paid part of the difference between the target price and the market price, up to 2.4 million pounds of milk a year on each farm.

Supporters say the MILC program is a key safety net that helps farmers deal with the ups and downs of the market. Because all farmers are paid the same rate, based on the market price in Boston, the program has not created the regional divisions that killed the Northeast Interstate Dairy Compact a few years ago.

On the other hand, caps on production have riled owners of larger farms. The National Milk Producers Federation, representing farmer-owned cooperatives, has no official position on extending the program, said a spokesman, Christopher Galen.

A spokeswoman for Rep. John M. McHugh, R-Pierrepont Manor, said the extension prevents farmers from losing payments next year and gives lawmakers more time to work on a program that would not be based on government payments.

That idea, which would create regional marketing boards, "is far from dead," said Mr. McHugh's spokeswoman, Brynn A. Barnett.

If the regional marketing boards are approved, New York and other states could forgo payments through the MILC program, letting the money flow instead to the Upper Midwest. That system would work better for everyone than simply leaving the MILC program in place, Sen. Charles E. Schumer, D-N.Y., said Wednesday.

"We'll continue working on that next year," Mr. Schumer said in a conference call with New York reporters.

The extension passed by the Appropriations Committee also lifts a rule that restricted payments to family members who combine some aspects of the businesses but keep others separate. For instance, family members who share land and equipment but own separate herds will no longer be subject to a maximum annual benefit, Mr. McHugh's office said.

Experts debate the value of the MILC program to the dairy industry. While supportive lawmakers say it keeps small farms from going out of business when prices tumble, one study last year suggested the program keeps market prices for milk artificially low.

The Food and Agricultural Policy Research Institute at the University of Missouri published a report in April 2003 suggesting that market prices would climb faster if the MILC program were allowed to expire. And if the program were extended without production caps, milk supplies would grow and prices would be more depressed than in any other scenario, the report predicted.

The more government payments grow, the study suggested, the more market-level prices would be eroded through bigger milk supplies.

In New York, the report showed, farmers would receive 64 cents more per 100 pounds of milk in 2006 if the MILC program were to continue than if it expires next year. But by 2012, the difference would narrow to 25 cents. The state's farmers would see an even smaller difference if payment caps based on production were removed, institute researchers found.