In recognition of your time, we’ll attempt to summarize recent events or actions making dairy headlines and reported in our weekly digital newsletter, Progressive Dairyman Extra. Then, we’ll try to put that news into perspective and briefly describe how it might affect you.
DFA ANNUAL MEETING
Dairy Farmers of America (DFA) held its 21st annual meeting March 18-20, in Kansas City, Missouri. DFA officials reported net income of $108.5 million for 2018, based on net sales of $13.6 billion, both down from 2017. When including non-member milk, DFA directed the marketing of 64.5 billion pounds of milk, representing just under 30 percent of the total U.S. milk marketings.
With milk volumes up in 2018, declining sales and income were primarily the result of lower milk and dairy commodity prices. The U.S. annual average all-milk price was $16.20 per hundredweight (cwt) in 2018 compared with $17.65 per cwt in 2017. The average 2018 price DFA paid to members was $16.04 per cwt compared with $17.57 per cwt in 2017. Payments to members for milk marketed in 2018 totaled $8.45 billion compared to $8.83 billion in 2017.
Culminating a year-long review of guidelines outlined at the 2018 annual meeting, 2019 meeting delegates voted to leave establishment of base/excess programs up to the co-op’s seven individual councils. According to DFA officials, there was no consensus within DFA as a whole, or even within individual councils, for the widespread adoption of a national base/excess program. There are currently six separate programs in three councils.
Despite the lengthy stretch of lower milk prices, Rick Smith, DFA president and chief executive officer, said the cooperative needed to strengthen its equity position to invest in milk markets and be in the position to take advantage of other market opportunities. That will include adjustments in DFA capital retention and patronage earnings programs, asking members to invest a larger share of their milk check and patronage earnings back into the co-op.
Under a timeline outlined during the meeting, the DFA board will provide details on capital restructuring to members by the middle of 2019, with implementation likely before Jan. 1, 2020.
In response to questions, Smith said the co-op’s board was also watching as Dean Foods explores potential strategic business alternatives, including selling off assets, forming joint ventures, selling the business or a combination of any of those.
While many in the industry are openly questioning whether DFA is a likely player if Dean decides to divest its fluid milk operations, industry sources say the situation is complicated by several factors, not the least of which is the long-term decline in fluid milk consumption.
In addition, any acquisition of Dean assets by an existing large U.S. dairy company would come under scrutiny of the Department of Justice (DOJ), related to business concentration within milk markets. Dean’s pension obligations with current and retired employees could weigh on any sale. Another concern is the possibility any potential sale of Dean assets could attract the interest of large, foreign-owned companies.
John Wilson, senior vice president and chief fluid marketing officer, said DFA is forecasting U.S. milk prices to be slightly above the average of 2017, which would make the 2019 average the second highest since 2014. A stronger federal dairy safety net will benefit producers’ bottom lines. DFA’s member farms will invest a larger share of their milk check and patronage earnings back into the co-op.
RETROACTIVE MPP-DAIRY SIGNUP
As approved in the 2018 Farm Bill, the USDA announced a retroactive 2018 Margin Protection Program for Dairy (MPP-Dairy) signup period for dairy farmers who participated in the Livestock Gross Margin for Dairy (LGM-Dairy) program last year.
In February 2018, Congress had altered the MPP-Dairy program as part of a federal budget bill, sharply reducing margin insurance premium levels, raising the Tier I level coverage to 5 million pounds of milk per year, changing margin calculations to monthly and reopening the 2018 enrollment period.
With weakening milk prices in early 2018 – and prior to the announcement and implementation of new MPP-Dairy provisions – some producers enrolled in LGM-Dairy to mitigate downside risk. However, a federal law prohibited those dairy farmers from participating in both LGM-Dairy and MPP-Dairy, and many missed out on MPP-Dairy payments totaling many thousands of dollars.
The retroactive signup period runs through May 10 at county Farm Service Agency (FSA) offices. FSA is sending a postcard with program details to all dairy producers who had LGM-Dairy coverage in any month of 2018. Eligible producers must visit their county FSA office to sign up and make a coverage election for retroactive 2018 MPP-Dairy payments. In some cases, producers may need to establish a milk production history to calculate indemnity payments.
There is a $100 administrative fee, and premiums must be paid at the time of enrollment, or an assignment can be created to collect the premiums once the indemnity is paid. All payments are subject to a 6.6 percent sequestration deduction.
Previously published reports estimated up to 400 U.S. dairy farmers who had purchased LGM-Dairy policies for 2018 were blocked from participating in MPP-Dairy. Eligible dairy producers who retroactively enroll at the $8-per-cwt coverage level could see MPP-Dairy indemnity payments for eight months of 2018: February through August, and December.
CLASS I SKIM MILK PRICE FORMULA
Bit by bit, other dairy provisions included in the 2018 Farm Bill are moving toward the implementation stage. The USDA announced an amendment to the Class I skim milk price formula under the Federal Milk Marketing Order (FMMO) program.
Currently, the Class I skim milk price is calculated using the “higher of” the monthly advanced pricing factors for Class III or Class IV skim milk, which reflect dairy product survey prices for the two weeks prior to the price announcement, plus the applicable adjusted Class I differential. Because market prices for these surveyed products fluctuate, the “higher of” factor used to determine the Class I skim milk price can change, increasing risk and uncertainty associated with hedging.
Effective May 1, the new formula for the FMMO Class I skim milk price will be the average of the monthly Class III and Class IV advanced pricing factors, plus 74 cents per hundredweight, plus the applicable adjusted Class I differential.
Using the simple average of Class III and IV milk prices should make it possible for buyers to more fully hedge fluid milk purchases using the Chicago Mercantile Exchange (CME) futures market, according to John Newton, Market Intelligence director with the American Farm Bureau Federation. Over time, the change is anticipated to have little to no impact on dairy farmer milk prices.
- Progressive Dairyman
- Email Dave Natzke