You’re busy – milking cows, managing employees and getting ready for spring. With that in mind, Progressive Dairyman
Natzke dave
Editor / Progressive Dairy
looks at issues in the news impacting you and your dairy business.

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.


What happened?

USDA staff continued to play catch-up after the government shutdown, issuing several key dairy reports affecting producers at Progressive Dairyman’s press deadline. Here’s a summary:

  • Milk production: December 2018 U.S. milk production continued a three-month streak in which year-over-year growth was less than 1 percent. Cow numbers declined for a fourth consecutive month and ended the year down 49,000 head from when the year began. Total U.S. milk production grew to 217.5 billion pounds in 2018, up just 0.9 percent from 2017.

  • Milk prices: The December U.S. average milk price fell another 60 cents per hundredweight (cwt) from November to $16.40 per cwt, the lowest since August. The 2018 milk price averaged $16.18 per cwt, $1.47 less than 2017 and the lowest annual average since 2009.

  • MPP-Dairy: With higher corn, soybean meal and alfalfa hay prices, the overall December 2018 U.S. average feed cost increased to $8.55 per cwt of milk sold. The national average income margin, calculated under the Margin Protection Program for Dairy (MPP-Dairy), was about $7.85 per cwt. That means MPP-Dairy participants insured at the $8 margin level will see an indemnity payment of about 15 cents per cwt on their December marketings.

What’s ahead?


The latest USDA forecast estimates 2019 milk production at 220 billion pounds, up 1.1 percent from 2018. The 2019 U.S. all-milk price will average about $17.25 per cwt, or about $1.07 per cwt more than 2018. Based on the strength of butter and nonfat dry milk prices relative to cheese, Class IV milk prices could continue to be the “higher of” in comparison to Class III prices throughout 2019, although the gap will narrow later in the year. MPP-Dairy is replaced by the Dairy Margin Coverage (DMC) program in 2019 (see below).

The bottom line:

There are lots of wild cards, especially related to trade agreements and their impact on dairy and feed. As of the end of February, the outlook for milk prices is better, but only marginally so. The federal dairy safety net improves dramatically.


What happened?

More accurately: “What hasn’t happened, yet?” At Progressive Dairyman’s press deadline, there were no details available regarding the sign-up period for the new DMC.

What’s next?

The USDA Farm Service Agency (FSA) could release enrollment details at any time. When it does, analysis by Zach Myers, risk management program manager with Pennsylvania’s Center for Dairy Excellence, shows projected returns make 2019 DMC participation attractive for most producers.

The projections below are for dairy operations at Tier 1 (producing 5 million pounds of milk annually or less) and Tier 2 (those covering the first 5 million pounds of annual milk production) levels.

As of Feb. 20, milk and feed futures prices indicated DMC margins could remain below $9.50 per cwt through October, which means producers insuring margins at that level could receive indemnity payments every month, January-October 2019.

Producers selecting the top $9.50-per-cwt margin and maximum coverage on 95 percent of production history would pay about $1,500 in premiums per 1 million pounds of milk. If current margins don’t change significantly, indemnity payments in January alone would be about $1,075 per million pounds followed by about $850 per million pounds in February. Current margin projections mean those producers could see indemnity payments of more than $4,900 per million pounds of milk for all of 2019.

Taking calculations a step further, a producer covering 5 million pounds of milk at the 95 percent level (4.75 million pounds) and $9.50 margin would pay an estimated $7,125 in annual premiums and earn a net indemnity after premiums of $16,222. (The total does not include a mandatory 6.6 percent sequestration deduction on government payments.)

The bottom line:

Market conditions change but, under the scenario described above, current forecasts indicate total 2019 DMC premiums would be covered by indemnity payments in just the first two months of the program.


What happened?

Participation in another risk management program – Dairy Revenue Protection (Dairy-RP) continues to grow. As of Feb. 18, the projected revenue from 16.5 billion pounds had been covered. Just over 1,250 producers had purchased 3,816 quarterly endorsements. Total premium costs were about $55.3 million, with USDA subsidies covering about $23 million of that.

We also know dairy farmers are overwhelmingly selecting the maximum 95 percent coverage level when purchasing Dairy-RP. Based on data as of Feb. 18, the revenue on about 14.9 billion pounds of milk was covered at the top level, representing about 90 percent of all milk covered under Dairy-RP since the program was launched on Oct. 9, 2018.

What’s next?

Dairy farmers interested in or already participating in Dairy-RP are approaching a quarter pole. The next deadline is March 15 for those seeking to buy coverage for the second quarter (April-June) of 2019.

The first quarter of 2019 ends on March 31, but it will be late April when dairy producers who purchased coverage for that quarter find out whether they’ll be eligible to receive indemnity payments for that period, according to Kent Horsager, president of Ag Hedge Desk, a commercial trading desk and agricultural consulting company that works with both producers and Dairy-RP insurance agents.

Based on the USDA Risk Management Agency timeline, milk class and component prices used in revenue settlements are announced 20 days after the quarter ends, or about April 20. Approved insurance providers (AIPs) then have 10 days to notify their Dairy-RP clients if they are eligible for indemnity payments, based on coverage selected. Producers must then provide the AIPs with actual milk production figures for the quarter, and the AIPs then have 30 days to make indemnity payments.

The bottom line:

Based on that schedule, a dairy farmer who purchased Dairy-RP coverage for the first quarter of 2019, and was eligible to receive an indemnity payment, could see a check anytime between May 30 and July 30, depending on how promptly the required documents have been completed.


What happened?

Lender surveys from Chicago, Dallas, Kansas City, Minneapolis and St. Louis Federal Reserve districts showed interest rates continued to move higher, in some cases to decade-high levels.

What’s next?

The Federal Reserve board has taken a pause on interest rate hikes but left doors open for possible increases in the months ahead. The board’s Federal Open Market Committee meets again on March 19-20.

The bottom line:

Any Federal Reserve interest rate adjustments tend to have the most impact on variable-rate loans, and demand for those is about to pick up as farmers seek operating loans for spring planting. That’s happening in a low-income, tight-margin environment in which many farmers may have already worked down available credit lines.  end mark

Dave Natzke