With the calendar turning to November, attention on dairy risk management for 2023 picks up.
Dairy Margin Coverage program
Dairy producers can now enroll for 2023 coverage under the Dairy Margin Coverage (DMC) program through Dec. 9 at local Farm Service Agency (FSA) offices.
Producers will need to certify to commercially marketing milk, pay the $100 administrative fee and sign the DMC contract, selecting the annual milk volume and coverage level for the year.
Recent adjustments to DMC continue in effect in 2023. Small and midsized dairies can enroll in the Supplemental DMC and adjust annual milk production histories to 2019 levels, up to the 5-million-pound Tier I cap. Supplemental DMC coverage is applicable to calendar years 2021, 2022 and 2023.
Producers who did not enroll in Supplemental DMC last year should complete that enrollment before enrolling in the 2023 general DMC program. For producers who enrolled in Supplemental DMC in 2022, the supplemental coverage will automatically be added to the 2023 DMC contract.
If a dairy operation enrolls in 2023 DMC and has 2022 DMC unpaid premium fees or unpaid receivables for regular or supplemental premium fee debt, 2023 enrollment will not be approved until the 2022 premium debt is satisfied.
The August 2022 DMC margin was $8.08 per hundredweight (cwt), down $1.84 from July and the first month the margin fell below the top Tier I insurable level of $9.50 per cwt in 2022, triggering indemnity payments estimated at $47.9 million to more than 17,000 dairy operations.
Read: August DMC margin triggers first indemnity payment of 2022
The September 2022 DMC program margin will be announced on Oct. 31. Based on margin estimates on Oct. 13, substantial indemnity payments are projected for September milk marketings, with smaller payments possible through the end of the year. The September margin was expected to fall to $7.68 per cwt, triggering indemnity payments at $8, $8.50, $9 and $9.50 coverage levels. Margins for the final four months of 2022 were estimated as follows: October – $9.19 per cwt, November – $9.36 per cwt and December – $8.69 per cwt. Margin forecasts have not been calculated for 2023.
Dairy Revenue Protection
Dairy producers managing risk through the Dairy Revenue Protection (Dairy-RP) program are currently eligible to cover revenue through four quarters of 2023 and the first quarter of 2024. The sales period for first-quarter 2023 coverage closes on Dec. 15.
Dairy-RP coverage cannot be purchased on days when major USDA dairy reports are released that could impact markets, including Milk Production, Cold Storage and Dairy Product reports (see Calendar). Dairy-RP is also not available on days when applicable futures contracts move limit-up or limit-down, or on days when Chicago Mercantile Exchange (CME) trading is closed due to holidays.
The market changes daily and Dairy-RP endorsements must be purchased between the CME market closing and the next CME opening.
Livestock Gross Margin for Dairy
Livestock Gross Margin (LGM-Dairy) is another subsidized margin insurance program administered by the USDA’s Risk Management Agency.
LGM-Dairy provides protection when feed costs rise or milk prices drop and can be tailored to any size farm. LGM-Dairy uses futures prices for corn, soybean meal and milk to determine the expected gross margin and the actual gross margin. LGM‑Dairy is similar to buying both a call option to limit higher feed costs and a put option to set a floor on milk prices.
Coverage can be purchased on expected milk marketings over a rolling 11-month insurance period. For example, the insurance period during the final week of January contains the months of February through December. Coverage begins the second month of the insurance period, so the coverage period for this example is March through December.
Sales periods for the LGM-Dairy program are open on a weekly basis. Unlike Dairy-RP, LGM-Dairy is available even if a sales period falls on the day of a USDA report. Premium payments are due at the end of the insurance period.
'Milk loss' program proposal considered
Jim Mulhern, president and CEO of the National Milk Producers Federation (NMPF), said the organization, working with the USDA is developing a separate milk loss program proposal. Introduced last year, the proposal would reimburse dairy producers of all sizes for milk dumped on account of disasters that occurred in 2020 and 2021, including, but not limited to, derechos, excessive heat, winter storms including polar vortexes, droughts, hurricanes and wildfires.
Other resources
Zach Myers, risk education manager with the Pennsylvania Center for Dairy Excellence (CDE), will host a “Protecting Your Profits” webinar, Oct. 26, 12-1 p.m. (Eastern time). Myers will highlight the latest Class III and IV futures milk price forecasts and share updates on DMC margins and the Dairy-RP program.
Each webinar is available via podcast or phone and is archived for viewing later. To participate, click here or phone: (646) 558-8656. When prompted, enter meeting ID 848 3416 1708 and passcode 474057.
Read also: September USDA milk production report and USDA boosts milk production forecast but raises price projections too
Dairy margins started October weaker
The outlook for dairy margins declined over the first half of October, as milk prices weakened and feed input costs were steady to higher, according to Commodity & Ingredient Hedging LLC.
USDA’s October World Ag Supply and Demand Estimates (WASDE) report confirmed lower yield and production estimates for both the corn and soybean crops, which reduced forecast ending stocks from last month. This, along with a slower-than-normal start to planting in Argentina due to abnormal dryness, has helped to maintain a firm tone in the feed markets. Although milk prices have declined recently, they remain elevated from a historical perspective, supported by strong exports and butter prices that recently hit a record high.
