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DMC, Dairy-RP indemnity payments will help some producers weather COVID-19 storm

Progressive Dairy Editor Dave Natzke Published on 27 April 2020

While dairy producers continue to wait for details regarding the direct federal financial aid they’ll receive under the Coronavirus Food Assistance Program (CFAP), those participating in dairy risk management programs should start to see indemnity payments later this spring. However, less than half of U.S. annual milk marketings are covered under the Dairy Margin Coverage (DMC) and Dairy Revenue Protection (Dairy-RP) programs.

Read: USDA announces Coronavirus Food Assistance Program; no to DMC and supply management.

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Producers who took the extra steps to proactively manage their risk – even when the market pointed toward higher milk prices and margins last winter – are more likely to endure the COVID-19-related price declines than those who did not, according to analysis by John Newton, chief economist with the American Farm Bureau Federation, and Marin Bozic, dairy economist and assistant professor with the University of Minnesota.

Price declines continue

Milk prices have fallen sharply due to COVID-19-related demand destruction in the food service sector. The USDA’s April World Ag Supply and Demand Estimates (WASDE) report revised the 2020 milk price outlook substantially lower, forecasting an annual average price of $14.35 per hundredweight (cwt), down more than $5 per cwt (nearly 30%) from December’s forecast.

May Class III and IV milk futures prices, reflecting demand uncertainty expected to occur during the second quarter of 2020, declined by 39% and 42%, respectively, between Jan. 2 and April 23, 2020.

Moreover, with milk being dumped or sold at distressed prices, the reblending of these losses across cooperative member producers or depooling of milk by independent processors is likely to result in farm-level milk prices that have declined by far more than what’s occurred in the futures markets, Newton and Bozic note.

Risk management programs

A study by Bozic and dairy market analyst Matt Gould estimated that as of April 2, Dairy-RP was projected to pay more than $900 million to participating dairy farmers; DMC was expected to make payments totaling nearly $500 million. Read: Impact of COVID-19 on Dairy Margin Coverage and Dairy Revenue Protection projected indemnities in 2020.

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Since that study was released, Class III and IV milk prices have declined by 18% and 10%, respectively.

As of April 23, DMC and Dairy-RP were expected to make indemnities totaling nearly $570 million and $1.3 billion, respectively. A highest level of the indemnities will likely be made in the second quarter of 2020.

Under DMC, price expectations indicate that a farmer covering 5 million pounds of milk (Tier 1) and covering milk at the maximum $9.50 per cwt coverage option could receive nearly $100,000 during 2020. The challenge is that about 48% of U.S. dairy operations and about 65% of annual milk marketings are covered under DMC in 2020. Of that, Newton and Bozic note, only 28 billion pounds was enrolled in DMC at the maximum protection level. As a result, few producers will actually receive the highest safety net protection available under DMC.

DMC benefits were expected to be the highest in Wisconsin at $135 million, followed by Minnesota at $73 million. Farmers in states with larger dairy herds do not benefit as much from DMC due to the 5-million-pound threshold. For example, DMC payments in California were expected to reach $52 million, while Idaho payments will likely total less than $12 million

Under Dairy-RP, more than 40 billion pounds of milk were insured for calendar year 2020, and after taking into consideration of the optional protection factor, more than 51 billion pounds of milk have Dairy-RP coverage.

Dairy-RP does not have limitations based on milk production like DMC, and as a result, the program payments are more aligned with the major milksheds in the U.S. California is currently projected to receive $268 million in indemnities, followed by Wisconsin at $178 million, Idaho at $121 million and Texas at $113 million.

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Based on the analysis from Newton and Bozic as of April 23, Dairy-RP and DMC combined are currently expected to make nearly $2 billion in payments to dairy farmers due to COVID-19-related milk price declines. During the second quarter, when the milk prices are expected to be the lowest, Dairy-RP and DMC are expected to pay more than $1 billion to dairy farmers,

For state-by-state estimates, read: Reviewing expected benefits of Dairy Revenue Protection and Dairy Margin Coverage, posted on the AFBF Market Intel website.

March DMC factors announced April 30

DMC margin factors on March milk marketings will be announced April 30. Based on milk and feed futures prices at the close of trading on April 24, the DMC Decision Tool estimates the March margin will be $9.15 per cwt, triggering an indemnity payment for those covered at the $9.50 per cwt level.

From there, the outlook gets much worse. As of April 24, monthly DMC margins were forecast at:

  • April – $5.83
  • May – $4.66
  • June – $4.64
  • July – $5.77
  • August – $6.96
  • September – $7.83
  • October – $8.48
  • November – $8.85
  • December – $9.05

Using those estimates, the average projected 2020 DMC Margin was $7.67 per cwt and just $6.90 over the final three quarters of the year. Under that scenario, monthly DMC indemnity payments for those insured at the highest level could be nearly $5 per cwt in May and June.  end mark

Dave Natzke
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