With a USDA extension giving dairy producers several more weeks to enroll in the Dairy Margin Coverage (DMC) and Supplemental DMC programs, many producers are being urged to reevaluate their initial decisions not to sign up for the federally subsidized safety net program in 2022.
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Editor / Progressive Dairy

Current milk price and feed cost estimates forecast DMC indemnity payments may not be triggered throughout 2022. In an effort to save premium costs, fewer producers have enrolled. According to the USDA, about 8,969 operations had enrolled at the time the deadline extension was announced. That’s just 48% of those enrolled in 2021.

In part due to that low enrollment, the USDA Farm Service Agency (FSA) has extended the sign-up deadlines until March 25.

Historically, dairy producers have waited until the deadline to enroll in DMC, hoping to get a clearer picture of milk and feed prices, noted Paul Bleiberg, senior vice president for government relations with the National Milk Producers Federation (NMPF). NMPF is urging dairy producers to look at DMC as insurance protection in the event that, either through lower milk prices or higher feed costs, margins shrink in 2022. Using the online DMC Decision Tool or other methods to try to predict margins to determine participation could be costly.

Decision Tool questions

The USDA’s DMC Decision Tool has long been touted as a tool for producers to use when selecting DMC coverage. The online tool uses alfalfa hay, corn, soybean and milk price forecasts to approximate monthly DMC margin costs, allowing producers to determine what coverage level to select.

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The current online tool, however, has not been updated using the higher-cost alfalfa hay incorporated into the program in late 2021. Instead, the online calculator is still factoring in a lower estimated price for a blend of alfalfa hay. That underestimates the feed cost side of the equation and overestimates the potential income margin.

Based on retroactive DMC hay price adjustments for 2019-20, the price for premium dairy-quality alfalfa hay was approximately $15-$16 per ton higher than the average alfalfa blend price. When feed costs were adjusted to account for the higher-priced hay over the same period, the difference in feed costs and thus, indemnity payments in affected months, was about 20 cents per hundredweight (cwt).

Even with that hay price adjustment and based on current market conditions, indemnity payments may still not likely be triggered in 2022. Producers are being warned, however, that a similar optimistic margin outlook in late 2019 and early 2020 reduced DMC enrollment, and many producers missed out on indemnity payments when margins shrunk.

In a statement following USDA’s extension announcement, NMPF CEO and President Jim Mulhern urged producers to take advantage of the extension to enroll.

“DMC offers cost-effective margin protection for small and medium-sized producers and inexpensive catastrophic coverage for larger dairies. It provides critical protection against unforeseen market disruptions – and if the past two years have shown anything, it’s that unforeseen market disruptions can happen. We urge all producers to sign up for DMC protection, part of a suite of NMPF-supported, federally backed risk management that also includes the Dairy-RP [Dairy Revenue Protection] and LGM-Dairy [Livestock Gross Margin for Dairy] programs.”

“The point we're trying to make is, don't try to make the decision based on whether you think indemnity payments are going to kick in; assume DMC might be needed,” NMPF’s Bleiberg said. “You don't want to be in bad times. Since we’re not sure when the bad times are going to be, it's always better to have a safety net to be prepared. People should be looking at that top level of coverage as much as possible.”

In 2019, approximately 23,387 dairy operations, representing almost 80% of dairies with established milk production history, covered more than 178 billion pounds of milk (73% of production history) under DMC. Indemnity payments that year totaled more than $452 million.

With a much more optimistic milk price outlook entering 2020, enrollment fell to 13,492 dairies, about 49% of those with established production history. They covered 121 billion pounds of milk (about 52% of production history).

Then COVID-19 struck, disrupting dairy markets and sending prices plummeting. When NMPF asked the USDA to reopen DMC enrollment, the USDA instead created the Coronavirus Food Assistance Program (CFAP), providing direct assistance to agricultural producers for pandemic-related financial losses, Bleiberg said. At the conclusion of 2020, DMC indemnity payments paid out to a smaller pool of participants fell to about $234 million, nearly half the 2019 total.

With 2020 fresh in their memory, DMC enrollment was substantially higher in 2021. At last count, 18,863 operations were enrolled, 74% of those with established production history, covering nearly 163 billion pounds of milk (76% of production history). Through mid-February, the program had paid out nearly $1.2 billion in indemnity payments, averaging about $60,275 per participating dairy operation.

Addressing dairy producers in Farm Credit East and Pennsylvania Center for Dairy Excellence (CDE) webinars this winter, Christopher Wolf, Cornell University dairy economist, noted that while healthier margins are forecast for 2022, downside risk on the milk price, especially related to Class III milk, with and upside risk potential on the feed cost side related to a host of factors, creates uncertainty.

While he stopped short of advising producers on use of risk management tools, Wolf said enrollment in the DMC program would be a good baseline for Tier I (under 5 million pounds of annual milk production), especially with changes to the program that more accurately capture actual feed costs for premium dairy hay, and the Supplemental DMC which allows small to midsized producers to adjust milk production history higher.

“I'm suggesting that you approach this from purely a risk management point of view and not a profit-maximizing point of view,” Wolf said.

Some producers could be especially susceptible to downside risk, he warned.

“It starts with a look at your cost of production, your financial position, and look at your solvency and liquidity situation,” Wolf said. “If there's a bad year, it might push you too close to the edge on those financial measures.

“If you're not doing anything, you're self-insuring,” he added. “That might be a rational decision, but I think it's one that that you should go into with your eyes open and understand where you're at.”

Geoff Vanden Heuvel, director of regulatory and economic affairs with California’s Milk Producers Council, says both current and future markets are factors to consider when considering risk management.

“It’s always a bit tricky as a dairy producer trying to figure out how to manage risk – particularly on the milk income side,” he said. “The current market situation is unique. We have seen a rapid rise in feed costs and operating costs. Milk prices have finally responded and risen to levels unseen in the past. How long will these milk prices stay high? The futures prices are projecting a decline in prices later in the year. Our experience tells us that eventually they will come down, unless of course the dairy paradigm has permanently shifted.”

“Typically, once milk production becomes profitable, milk production increases to meet demand,” Vanden Heuvel said. “To increase production, we need feed and animals. Feed is very expensive, and the growth of beef from dairy animals may have a significant impact on how many dairy heifers might be available. Labor is an issue in most major dairy areas of the country. Many milk handlers have activated production limits on their producers. Long-term environmental challenges and costs create a significant risk profile to new or expanded dairy construction.

“The bottom line is the dairy industry is in uncharted waters,” Vanden Heuvel said. "There are many different options and opinions about what might happen and what can be done to prepare. It has been a wild ride for a while now, and it seems that uncertainty and risk will be the reality for some time to come.”

Enrollments for both 2022 DMC and Supplemental DMC programs are occurring simultaneously, but small and midsized producers eligible to make milk production history adjustments under Supplemental DMC must do so prior to enrolling in the 2022 DMC program.

Supplemental DMC coverage is applicable to calendar years 2021, 2022 and 2023. Participating dairy operations with supplemental production may receive retroactive supplemental payments for 2021 in addition to payments based on their established production history. 

Applications for Supplemental DMC payments will require a revision to a producer’s 2021 DMC contract and must occur before DMC enrollment for 2022. The program limits Supplemental DMC payment to cover 75% of the difference between an eligible dairy operation’s actual 2019 milk marketings and its previous DMC milk marketing history. Eligible producers must provide FSA officials with their 2019 milk marketing statements, and DMC premiums are required on enrolled supplemental production at the standard premium rate.

For DMC enrollment, producers must certify with FSA that the operation is commercially marketing milk, sign all required forms and pay the $100 administrative fee. The fee is waived for farmers who are considered limited resource, beginning, socially disadvantaged or a military veteran.

Producers are urged to call their local USDA FSA office to schedule an appointment.  end mark

Dave Natzke