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April DMC margin triggers large indemnity payments

Progressive Dairy Editor Dave Natzke Published on 29 May 2020

A dramatic downturn in April’s U.S. average milk price has triggered the largest monthly indemnity payments in the Dairy Margin Coverage (DMC) program’s history.

April DMC margin: $6.03 per cwt

The USDA released its latest Ag Prices report on May 29, including factors used to calculate DMC margins and payments. Based on USDA calculations, the April DMC margin is estimated at $6.03 per hundredweight (cwt), down $3.12 per cwt from March and triggering indemnity payments for those covered at every insurable margin of $6.50 or higher (Table 1).

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052920 natzke dmc tbl 1

It’s the smallest milk income over feed cost margin since the DMC was created in 2019 and the smallest margin since June 2016 under the program’s predecessor, the Margin Protection Program for Dairy (MPP-Dairy), which utilized different margin calculations and indemnity payment triggers.

As a result, dairy operations that elected DMC Tier 1 margin coverage levels of $9.50, $9, $8.50, $8, $7.50, $7 and $6.50 and Tier 2 margin coverage levels at $8, $7.50, $7 and $6.50 will be issued payments. The USDA’s Farm Service Agency will begin processing payments on June 1.

DMC payments will see a sequestration deduction of 5.9%.

April milk price plummets

Pressured by the COVID-19 pandemic's disruption of the dairy supply chain and food service industry, the April 2020 U.S. average milk price fell $3.60 per cwt from March to $14.40 per cwt. The average was $3.30 per cwt less than April 2019 (Table 2).

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052920 natzke dmc tbl 2

Compared to a month earlier, milk prices fell substantially in all major dairy states. Largest declines were in Iowa (-$5), Illinois, Minnesota, Ohio and Wisconsin (all -$4.10 per cwt or more).

Compared to a year earlier, prices were down $4 or more per cwt in Illinois, Iowa, Minnesota and New Mexico.

The highest milk prices for April 2020 were in Florida ($19.70 per cwt), Oregon and Georgia ($17.60 and $17.40 per cwt, respectively); monthly lows were in New Mexico ($11.90 per cwt), Kansas and Michigan ($12.80 and $13 per cwt, respectively.

Corn, soybean meal prices drop, but hay more costly

Overall, April feed costs were lower than March, thanks to declines in U.S. average prices for corn and soybean meal.

The April 2020 U.S. average corn price was $3.29 per bushel, down 39 cents from the month before and the lowest since January 2018.

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Soybean meal averaged $295.39 per ton in April, down almost $17 per ton from March.

The average price for a blend of premium and all alfalfa hay used in DMC calculation was $195 per ton, up $5 per ton from March and the highest average since July 2019.

That yielded an average DMC total feed cost of $8.37 per cwt of milk sold, down 48 cents from March (Table 3) but nowhere near enough to offset the plummeting milk price.

052920 natzke dmc tbl 3

May payments even higher

The April DMC margin is likely just a preview to May calculations, which will be released by the USDA on June 30. Based on milk and feed futures prices at the close of trading on May 28, the DMC Decision Tool estimates margins are likely to drop below $5 per cwt in May, before moving back to about $8.50 per cwt in June. After that, the recent upswing in milk futures prices means DMC indemnity payments may not be triggered for July-December – but conditions change.  end mark

Dave Natzke
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