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.
DAIRY MARGIN COVERAGE PROGRAM
USDA Secretary Sonny Perdue laid out a tentative timeline for implementation of the new Dairy Margin Coverage (DMC) program. And the USDA announced the January milk income over feed cost margin, determining the month’s indemnity payment levels once the program is implemented.
Approved in the 2018 Farm Bill, the DMC replaces the Margin Protection Program for Dairy (MPP-Dairy), which expired at the end of 2018. Final USDA details regarding DMC were delayed during the 35-day government shutdown, and the program still requires a review from the Office of Management and Budget.
According to the projected timeline, the USDA is expected to make an online DMC calculator available by mid-April, giving dairy farmers interested in participating in the program a tool to determine premium costs.
Past participants of MPP-Dairy who are eligible for premium refunds should see payments by the end of April. Sign-up for DMC could start on June 17, with DMC indemnity payments starting shortly after July 4. Indemnity payments will be retroactive to Jan. 1, 2019, so participating farmers could see substantial payments.
For example, a dairy operation with an established milk production history of 5 million pounds that elects the $9.50 coverage level for 95 percent of its production history would be covered for 4.75 million pounds (95 percent of 5 million pounds, or 47,500 cwt). Breaking it into monthly increments, farmers maximizing coverage would be eligible to receive payments at the USDA-determined monthly payout rate on 395,800 pounds (3,958 cwt) each month the margin fell below $9.50 per cwt.
Based on milk and feed costs, the USDA announced the January 2019 “margin” of $7.99 per cwt. So an operation maximizing coverage on its first 5 million pounds of milk for the year would receive a January payment of $5,977 (the 3,958 cwt covered for the month, multiplied by the $1.51- per-cwt January difference in actual margin).
All indemnity payments are subject to a 6.6 percent sequestration deduction. Subtracting the sequestration deduction of about $395, the payment drops to about $5,582. That does not include any deductions for premiums.
The January indemnity payment would cover a large share of the entire year’s premium costs. The annual premium rate for coverage at the $9.50 level is 15 cents per cwt, or $7,125 for 4.75 million pounds (47,500 cwt) of milk.
If the operation makes a one-time election to sign up for DMC coverage for 2019 through 2023 at the same coverage levels, it will be eligible to receive a 25 percent discount on its premiums. In that case, the total premium cost for all of 2019 would be $5,344 (47,500 cwt times the 11.25 cents per cwt).
Bottom line: Check with your local USDA Farm Service Agency office for sign-up details. Under the maximum coverage, a dairy operation would receive back more than its full annual premium with the January payment alone, if it signs up for coverage at the discounted five-year locked-in premium rate. If a farm signs up for 2019 only, it would still recoup most of its full-year premium from the January payout – with more payments likely. Markets can change but, based on projections as of March 6, monthly DMC margins are expected to remain below $9 per cwt through April and below $9.50 per cwt through September.
Negotiators from the U.S., Mexico and Canada approved a trade agreement last fall, designed to replace the North American Free Trade Agreement. The agreement maintains and enhances provisions beneficial to U.S. dairy producers.
Tom Vilsack, president and chief executive officer of the U.S. Dairy Export Council (USDEC), called the USMCA one of the five critical pivot points to improving U.S. dairy exports in 2019 and beyond. However, he expressed concerns regarding the timeline for ratification of the trade agreement. Vilsack made his comments during the Western Dairy Management Conference, on Feb. 26 in Reno, Nevada.
In addition to opening or reopening markets in Canada and Mexico, the USMCA will provide additional protections against geographical indicators being imposed by the European Union in some bilateral trade agreements.
Vilsack said the USMCA will not likely be ratified by Mexico and Canada until U.S. import tariffs on steel and aluminum have been lifted, a possibility in 2019. He hopes the U.S. ratification process will be completed by late summer or early fall. Ratification in the U.S. will be made even more difficult as the timeline moves closer to the 2020 general election, when trade agreements become a political football.
Bottom line: “In the U.S., agriculture will have to be very, very engaged in lobbying for passage of USMCA,” Vilsack said. “It’s not clear today the votes exist for passage of this trade agreement. There are folks both on the left and the right who have expressed concerns.”
USDEC and National Milk Producers Federation (NMPF) officials have begun to emphasize the importance of dairy-related jobs and the economic impact in congressional districts and states as they lobby for passage.
“For a long time we’ve made the mistake of only discussing agriculture in the context of farms, producers and ranchers,” Vilsack said. “We need to expand that by talking about the food and agricultural industry. As a single industry, 43 million people are directly and indirectly connected and employed in that industry. That’s 28 percent of the entire workforce of the U.S. If we can begin to educate policymakers about the significant economic importance of this industry, it might create easier times for getting trade agreements approved.”
U.S. DAIRY EXPORTS
In addition to ratification of the USMCA, Vilsack said U.S. trade agreements with China and Japan, and declines in stockpiles of U.S. dairy products and European Union (EU) milk powder inventories, created the potential for improvements in U.S. dairy exports in 2019.
Completing U.S. trade agreements with China and Japan are critical, offering different opportunities but facing different challenges, Vilsack said. Specifically, if the U.S. can gain a level playing field on dairy trade with Japan, U.S. dairy market share could double, with the value of that market tripling.
Under the U.S. process, the timeline for completion of bilateral agreements is long and complicated by political changes – further complicated by the recent government shutdown. He said the EU has had a longer history of being far more aggressive in seeking bilateral trade agreements and moving more quickly.
Bottom line: “More, New, Better” is the mantra as USDEC works toward the goal of exporting 20 percent total solids production, Vilsack said. “We want to do more, we want to do things that are new, and we want to do things we’ve done in the past better,” he said.
As examples, Vilsack highlighted conducting dairy ingredient innovation seminars in Mexico to highlight functionality and versatility of powders and whey proteins; working to develop cheese channels in China, Hong Kong and Taiwan; restaurant and home cheese promotions in South Korea; creation of a “center of excellence” in Southeast Asia to showcase USDEC member companies; and expanded pizza cheese promotions in Japan. One overriding component is creating awareness of a U.S. dairy marketing and packaging icon or “seal” to help foreign customers easily identify U.S.-sourced dairy products.
Moving toward a goal of exporting 20 percent of U.S. dairy solids production, Vilsack highlighted ongoing efforts, specifically targeting potential dairy consumers in Southeast Asia and China. Efforts include helping identify dairy ingredient and product innovations to meet the tastes and demands of specific markets, and development of relationships to move U.S. dairy products into those marketing chains. He said Southeast Asia was a gateway to a middle class population growing exponentially.
“We’re sending a message that we intend to be in this market for good and be very competitive in it,” Vilsack said.
While exports as a percentage of production has increased in recent years, Vilsack admitted growth had not translated into stronger milk prices for dairy producers. “It’s been a tough couple of years for dairy farmers,” he said. “We’re dedicated to trying to ease that by expanding access to exports.”
- Progressive Dairyman
- Email Dave Natzke