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Dairy Margin Coverage program participation should pay off early for many producers

Progressive Dairyman Editor Dave Natzke Published on 20 February 2019

We don’t know precisely when enrollment will be opened for the Dairy Margin Coverage (DMC) program, but once it does, those dairy farmers insuring margins on the first 5 million pounds of milk at the top margin level should see an early payback.

The USDA’s Farm Service Agency is still working on implementation of DMC, approved in the 2018 Farm Bill. However, Zach Myers, new risk management program manager at Pennsylvania's Center for Dairy Excellence (CDE), provided a possible preview of things to come during a monthly “Protecting Your Profits” conference call, Feb. 20.

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DMC projections

Based on milk and feed futures prices at the time of the conference call, monthly DMC margins are projected to remain below the maximum $9.50 per hundredweight (cwt) coverage into October 2019, meaning benefits will far outweigh costs of participation at the Tier 1 level (5 million pounds of milk or less annually). It is important to note that Tier 2 producers (5 million pounds of milk and greater annually) can also participate at the Tier 1 premium and margin coverages on the first 5 million pounds of total production.

A Tier 1 producer selecting the $9.50 per cwt margin and 95 percent of milk production history would pay about $1,500 in premiums per 1 million pounds of milk. If current margins don’t change significantly, indemnity payments in January alone would be about $1,075 per million pounds, followed by about $850 per million pounds in February. Thus, January-February indemnity payments would more than cover total annual premium costs.

Current margin projections mean a Tier 1 producer could see indemnity payments of more than $4,900 per million pounds of milk for 2019.

A producer covering the maximum 5 million pounds of milk at the 95 percent level (4.75 million pounds) and $9.50 margin level would pay an estimated $7,125 in annual premiums and earn a net indemnity after premiums of $16,222.

The total does not include a mandatory 6.6 percent sequestration deduction on government payments.

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While the DMC enrollment period has not been announced, two options already available are the Livestock Gross Margin for Dairy (LGM-Dairy) program and the Dairy Revenue Protection (Dairy-RP) program.

The February sales period for LGM-Dairy is Feb. 22-23.

During the week of Feb. 12-18, U.S. dairy producers protected revenue on another 1.2 billion pounds of milk under Dairy-RP, bringing the total milk volume covered since the program was launched last fall to 16.5 billion pounds. Based on data as of Feb. 18, the revenue on about 14.9 billion pounds of milk was covered at the 95 percent level. That represents about 90 percent of all milk covered under Dairy-RP since the program was launched on Oct. 9, 2018.

The latest report shows 2,222 dairy producers had filed Dairy-RP applications in 35 states. Of the applications, 1,251 have purchased 3,816 quarterly endorsements. Total premium costs on purchased endorsements were about $55.3 million, with USDA Risk Management Agency subsidies covering about $23 million of that.

Under new rules in the 2018 Farm Bill, dairy producers can participate in LGM-Dairy, Dairy-RP and DMC. However, if a dairy producer elects to participate in both LGM-Dairy and Dairy-RP, they cannot be used in the same quarter, Myers noted.

Market fundamentals

Looking at market fundamentals, Myers said preliminary slaughter numbers indicate dairy cow culling was up more than 13 percent in December compared to a year earlier, and 2018 total slaughter was up more than 5 percent from 2017.

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U.S. dairy product inventories remain strong, although December 2018 butter and nonfat dry milk stocks were down from year ago levels, providing support for Class IV milk prices. Higher cheese stocks continue to weigh on the Class III price.

Tied to the government shutdown, consumer confidence fell slightly in January, while unemployment rose slightly.

The value of the U.S. dollar was weaker in relation to other currencies in January, and combined with Chicago Mercantile Exchange (CME) dairy product prices that are lower than comparable global prices, there should be incentives for increased U.S. dairy exports in 2019, Myers said.

Futures prices

Based on recent CME futures price settlements, Class III milk futures move above $16 per cwt in July 2019 through January 2020, peaking around $16.50 per cwt in September. Class IV futures prices are above $17 per cwt during July-December 2019, peaking at about $17.50 per cwt in September.

At the time of the monthly Protecting Your Profits call, futures price yield a 2019 Class III average of $15.66 per cwt, still $1 less than the five-year average; Class IV futures average $16.53 per cwt, about 40 cents above the five-year average.

Myers’ next Protecting Your Profits call will be March 27. All calls are recorded and archived.  end mark

Dave Natzke
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