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Dairy Margin Coverage program provides a better safety net

Published on 27 November 2019

With a fair amount of fanfare and promotion to overcome negative experiences related to its predecessor, a new “dairy safety net” was launched in 2019. Approved in the 2018 Farm Bill and based on adjustments made early in 2018 under a federal budget bill, the Dairy Margin Coverage program (DMC) replaced the expired Margin Protection Program for Dairy (MPP-Dairy).

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Implementation of DMC required recognition of MPP-Dairy shortcomings and actions to rectify them on multiple fronts.

One hurdle was the fact dairy farmers had paid a lot of premiums into MPP-Dairy between 2014 and 2017 with little return. By some estimates, premiums surpassed indemnity payments by up to $75 million over the period. The 2018 Farm Bill required the USDA to return any premiums not used to make indemnity payments during calendar years 2014 through 2017 back to dairy farmers. The USDA came up with two options: Up to 75% of the individual dairy farmer repayment could be used to pay for future premiums, and/or up to 50% could be taken as a direct cash repayment.

Another provision of the farm bill applied to producers who had been blocked from participating in MPP-Dairy in 2018. With producers allowed to opt out of MPP-Dairy in 2017 while program improvements were made, some dairy farmers sought risk management protection under a separate program, the Livestock Gross Margin for Dairy (LGM-Dairy) program. However, federal law prohibited producers from participating in both programs, and when 2018 MPP-Dairy provisions were made substantially more attractive, about 400 dairy farmers were prohibited from participating until a provision of the 2018 Farm Bill created an opening for them to retroactively participate in MPP-Dairy.

As USDA officials worked through a government shutdown in early 2019, DMC implementation details took shape, providing vastly more financial protection for dairy farmers.

As approved the previous year in the Bipartisan Budget Act, the Tier I level under the program was set at 5 million pounds of annual milk production, up from 4 million pounds in the original program.

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Among the biggest areas of change regarded insurable margin levels and the cost of premiums. Under the DMC program, higher Tier I margin coverage levels – at $8.50, $9 and $9.50 per cwt – were made available at substantially lower premium costs. To provide incentives for long-term participation, dairy operations making a one-time election for coverage for the entire five-year length of the farm bill could also receive a 25% premium discount.

While Tier II (milk production history above 5 million pounds annually) premiums remained higher, a move beneficial to large producers removed the existing 25% minimum annual milk production coverage requirement.

A provision under the farm bill also required the USDA to look at its feed cost calculations when determining monthly DMC milk income over feed cost margins, specifically analyzing the cost of higher-priced dairy-quality alfalfa hay.

Just prior to the opening of the DMC sign-up period on June 17, 2019, USDA Secretary Sonny Perdue announced a new hay price factor, incorporating a 50% blend price of the U.S. average alfalfa hay price and the average price paid for Premium and Supreme “dairy-quality” alfalfa hay in the five largest milk-producing states.

One point of contention remained and has only been partially addressed. Milk production history for most individual dairy operations was based on the highest milk production in years 2011, 2012 and 2013, with annual adjustments based on the national average increase in milk production. In 2019, the USDA created one opening for some: Dairy operations with an intergenerational transfer between 2014 and 2019 could take advantage of a one-time opportunity to increase their established production history.

Finally, for 2019 participation, dairy farmers also had the benefit of hindsight. Program enrollment was open until late September 2019, with any indemnity payments retroactive to Jan. 1, 2019. Dairy farmers waiting until sign-up deadline would know if they were eligible for indemnity payments for the first eight months of the year. Most were, providing an incentive to enroll.

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Total DMC 2019 indemnity payments for those enrolled as of Oct. 21 were estimated at about $305.8 million, averaging $13,369 per operation. The 2019 DMC payments were subject to a 6.2% sequestration deduction imposed by Congress. (The sequestration deduction falls to 5.9% in 2020.)

As USDA finalized 2019 enrollment figures, 22,873 dairy operations had signed up as of Oct. 21, 2019. That number represented about 81.5% of dairy operations with established milk production history and 82.1% of annual milk production (about 175.4 million pounds). (See state-by-state enrollment and indemnity payment details on pages 16-17 of this issue of Progressive Dairy.)

As 2019 came to a close, enrollment for 2020 was already underway, with a sign-up deadline of Dec. 13, 2019. Based on market conditions as of late October, income margins indicated there wouldn’t be any indemnity payments for the foreseeable future. However, markets change, and the DMC provides a substantially improved safety net over its predecessor.  end mark

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