In this column, Progressive Dairy
Natzke dave
Editor / Progressive Dairy
summarizes issues in the news and attempts to describe how they might affect dairy farmers. Look for more extensive background and details at Progressive Dairy.

 

Items in this column are compiled from Progressive Dairy staff news sources. Send news items to Dave Natzke.

DAIRY MARGIN COVERAGE (DMC) PROGRAM

What happened?

In early December, the USDA released some of the eagerly awaited details related to the Dairy Margin Coverage (DMC) program. Progressive Dairy followed up with additional questions for USDA Farm Service Agency (FSA) staff. There are three major provisions:

1. Establishment of a sign-up period for 2022 program enrollment

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2. Adjustments in determining average hay prices to calculate monthly feed costs and margins

3. Creation of a supplemental DMC provision for small and mid-sized dairy producers to update milk production history

What’s ahead?

1. We’ll start with the simple. The sign-up period for the 2022 DMC program opened on Dec. 13 and will run to Feb. 18, 2022, at USDA Farm Service Agency (FSA) offices. For 2022 DMC enrollment, producers must certify that their dairy operation is commercially marketing milk, sign all required forms and pay the $100 administrative fee. (The administrative fee is waived for farmers who are considered limited resource, beginning, socially disadvantaged or a military veteran.)

Premiums for 2021 must have been paid to enroll in 2022. Any payments DMC participants receive for either the hay adjustment or supplemental production history (see below) cannot be applied to 2022 DMC premiums. However, dairy producers with 100% share of their operation have the option to deduct required premiums from any indemnity payments they may receive in 2022.

Due to concerns over COVID-19 variants and staffing, producers are urged to call their FSA offices to set up appointments. To estimate the appropriate level of DMC coverage for a specific dairy operation, producers can use the online dairy decision tool (Dairy Margin Coverage).

The current payment sequestration deduction rate of 5.7% continues in 2022.

2. One provision affecting nearly all current DMC participants is the change in the feed cost formula to better reflect what dairy farmers pay for high-quality alfalfa hay. Payments are retroactive to January 2020. The FSA planned to have the hay price adjustment payments available for approval by county offices on the first day of 2022 DMC enrollment in mid-December.

The payments are distributed as lump sums, separate for 2020 and 2021. The agency is projecting about $29 million will be distributed to cover adjustments for 2020, with another $104 million to cover hay price adjustments through the first 10 months of 2021.

Due to variations in coverage elections by individual producers, the USDA did not provide specific payment rates. Here is some background and “best guess” estimates calculated by Progressive Dairy.

In 2019, the USDA began using an alfalfa hay blend price in DMC feed cost calculations. On a 50-50 basis, the calculation used the monthly average U.S. price for all alfalfa hay in 27 major hay-producing states and a monthly average price for “premium dairy hay” (Premium/Supreme alfalfa hay) in the five largest milk-producing states: California, Idaho, New York, Texas and Wisconsin. Both prices are reported in the USDA’s monthly Ag Prices report, usually on the last business day of the month.

Under the new formula, the USDA uses the premium dairy-quality alfalfa hay price at 100%, instead of the 50%-50% blended price. Hay price adjustment payment rates are based on calculations using the difference in those two formulas.

DMC indemnity payments were made in five months in 2020: March, April, May, September and December. It doesn’t look like the hay cost adjustment will trigger new payments at the $9.50 coverage level for any of the other seven months. There will be minor adjustments triggering indemnity payments for producers at lower coverage levels. For example, the adjustment in 2020 will provide new, small indemnity payments for those covered at the $6 level in April and $9 level in March 2020.

Most of the impact will be within coverage levels. The difference in the blended hay price and the premium dairy-quality hay price during the five affected months in 2020 averaged about $14.50 per ton. Multiplied by the DMC hay cost factor of 0.0137, that raises the hay price about 19.865 cents per hundredweight (cwt) of milk in the total DMC feed cost equation for those five months. Remember, DMC monthly payments are based on one-twelfth of annual milk production. Spread out over the full year, that averages about 8.2 cents per cwt on milk production history enrolled in DMC in 2020. At that approximate rate, the payments would be about $825 per million pounds of milk for 2020.

Moving into 2021, DMC payments were already triggered in every month in 2021 (through October). The difference in the DMC hay price and the premium dairy-quality hay price for January-October 2021 was about $15.95 per ton, or about 21.8515 cents per cwt in the monthly total feed cost. Based on those estimates, the payments would be about $1,820 per million pounds of milk for the first 10 months of 2021.

Remember, these are only “best guess” estimates, so confirm payment rates with FSA. Also, the hay adjustment payments for both 2020 and 2021 are subject to a 5.7% sequestration deduction.

Starting with the November 2021 DMC margin announcement, scheduled for Dec. 31, and into 2022 the revised feed cost calculation will use only the price for premium dairy-quality alfalfa hay to determine the DMC margin and potential indemnity payments.

On a related note, the 2021 production history change (see below) will affect the hay adjustment payment for 2021 only.

3. Finally, let’s attempt to dive into the milk production history provision.

The original DMC program established a production baseline for the years 2011, 2012 or 2013. The supplemental program allows small and mid-sized producers to update their annual milk production history to levels produced in 2019, with a cap of 5 million pounds per year.

Supplemental and established production history will be kept as separate records. Indemnity payments will be eligible on 75% of the difference between the two. For example, if a producer adds 1 million pounds of milk to their production history, they’d be eligible for indemnity payments on 750,000 pounds.

Indemnity payments are available retroactively for 2021 and during 2022 and 2023 DMC coverage years.

Applications for supplemental DMC payments will require a revision to a producer’s 2021 DMC contract and must occur before DMC enrollment for 2022. Eligible producers must provide FSA officials with their 2019 milk marketing statements. A verbal certification does not meet requirements.

DMC premiums are required on enrolled supplemental production at the standard premium rate, including those dairy operations with lock-in contracts who previously enrolled in DMC through 2023 and received a premium discount under a special sign-up enhancement.

Since production history adjustments will vary from farm to farm, determining individual payment rates here isn’t possible. According to the USDA spokesperson, FSA is projecting $137 million for 2021 supplemental DMC payments, with the total subject to change as dairy operations establish supplemental production history during the enrollment period.

Once supplemental production history is established and the 2021 DMC contract is revised and approved, payments could be processed by the next day.

As with the regular program, 2021 and 2022 DMC supplemental payments are subject to a 5.7% sequestration deduction. end mark

Dave Natzke