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.
FARM BILL/DAIRY MARGIN COVERAGE (DMC)
Signed into law in December, the 2018 Farm Bill changed the name of the Margin Protection Program for Dairy (MPP-Dairy) to the Dairy Margin Coverage (DMC) program and made fairly dramatic changes to the premium structure and available coverage.
All producers are now eligible to cover up to 5 million pounds of annual milk production at Tier 1 premium levels, and at margin levels up to $9.50 per hundredweight (cwt). New program coverage premiums at the Tier 1 and Tier 2 levels are listed in Table 1.
Tier 1 offers the most attractive premiums at the highest coverage levels. Catastrophic coverage under Tier 2 (above 5 million pounds) remains economical, but higher levels of protection are cost-prohibitive or unavailable. Dairy operations making a one-time election for coverage for the entire five-year length of the farm bill will also receive a 25 percent premium discount, regardless of whether coverage is under Tier 1 or Tier 2.
The DMC maintains existing production history calculations from the 2014 Farm Bill, allowing producers to use 2011, 2012 or 2013 as their base production level and accounting for annual updates indexed to national milk production growth through Jan. 1, 2019. There will be no milk production history adjustments after 2019. Dairies not in operation in 2014 or earlier, as well as new dairies, would designate one year to establish milk production history.
Beneficial to large producers, the farm bill removes the current 25 percent minimum annual milk production coverage requirement. And it allows operations to participate in the Dairy Revenue Protection (Dairy-RP) program and either DMC or the Livestock Gross Margin for Dairy (LGM-Dairy) program.
The USDA Farm Service Agency will conduct an enrollment and coverage election period early in 2019. Under the farm bill, the USDA had 60 days to establish the enrollment/election period, with a duration of 90 days. As of Progressive Dairyman’s press deadline, the government was shut down, and the sign-up period and other details had not been announced.
Bottom line: While waiting for final details from the USDA, you should begin to evaluate your full risk management strategies for 2019 and 2020 now.
Many people suggest DMC participation at the Tier 1 margin of $9.50 per cwt a “no brainer.” Due to that attractive relationship between Tier 1 premium costs and margin protection levels, enrollment and indemnity payments have the potential to be high. Based on 2018 conditions, DMC has the potential to pay out between $800 million and $1 billion in 2019, according to Marin Bozic, dairy economist with the University of Minnesota.
That cash infusion will help slow the dramatic dairy farm attrition rate seen in 2018. However, it also carries the unintended consequence that milk markets could be impacted, putting the milk supply-demand imbalance under further stress and limiting any milk price recovery in the near term.
Ongoing challenges with milk processing capacity will provide some growth constraints and could limit the likelihood of any large-scale dairy expansion. Slow growth in domestic dairy product marketing capabilities means an increase in U.S. dairy exports will be needed to help clear markets.
Short of any further voluntary (base) or mandatory supply management program implementation, DMC increases the likelihood of a dairy recession in the next two years – or at least a continuation of what we’ve seen over the past four years, according to Bozic and others.
With the Tier 1 cap of 5 million pounds of milk per year, U.S. dairy herds with about 200 cows will be able to insure a $9.50-per-cwt margin on virtually all of their milk. The nation’s largest herds will continue to capture the benefits of economies of scale, keeping cost of production lower.
That, according to Bozic, leaves every herd in the middle most vulnerable to the market pressures of supply and demand. That’s why it’s important – right now – to consider risk management strategies for 2019 and 2020.
“Think now about all the things you may want to do to make sure you’re not the one clearing the market or having to exit because you did not put the right protection in place when it was available,” Bozic said. Alternatives include the Chicago Mercantile Exchange futures and options, DMC, LGM-Dairy, Dairy-RP and forward contracting with your co-op.
- Progressive Dairyman
- Email Dave Natzke