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DMC enrollment deadline nears as dairy outlook turns weaker

Progressive Dairy Editor Dave Natzke Published on 18 November 2020

At first blush, it would appear dairy farmers are not heeding risk management warnings, even as storm clouds over 2021 milk prices grow darker. With the deadline about three weeks away, enrollment for the 2021 Dairy Margin Coverage (DMC) program continues at a slow pace. Enrollment numbers should jump soon.

The DMC enrollment period opened on Oct. 13 and runs through Dec. 11 at USDA Farm Service Agency (FSA) offices. As of Nov. 16, about 4,550 dairy operations (18% of those with established milk production history) had enrolled in the 2021 DMC program. Milk production enrolled was estimated at 36.6 billion pounds, also about 18% of the established history.

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However, the weekly totals reported by the USDA may not fully represent how much milk will eventually be covered under DMC next year.

About 13,490 dairy producers enrolled in the DMC program for 2020. Of those, more than 9,000 locked in participation through 2023 and received a 25% discount on their annual premiums, according to the American Farm Bureau Federation. However, they are not counted in the USDA 2021 DMC enrollment total until they pay the administration fee and recertify they are commercially marketing milk.

With crop harvest finally winding down, FSA officials expect more producers to finalize DMC paperwork during the final weeks of the enrollment period for 2021, which will substantially boost numbers and the percentage of milk covered.

Dairy markets are weakening

Dairy market analysts point to several signs that should move dairy producers to consider signing up for DMC in 2021. The first half of November has dramatically changed the dairy outlook, and plenty of clouds are looming.

At the forefront is the dramatic decline in cheese prices during the first half of November. For the week ending Nov. 13, average Chicago Mercantile Exchange (CME) cash prices for cheddar blocks and barrels dropped about 45 cents per pound from the week before, among the steepest declines on record. CME cash cheddar block prices declined another 14 cents per pound in trading on Nov. 17.

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The decline in cheese prices has pulled December 2020 Class III milk futures prices down about $4.25 per hundredweight (cwt) since the end of October. January 2021 Class III futures prices are down nearly $1.80 per cwt from their peak in early November.

Analysts share outlooks: Look out

Looking at producer income potential, the declining milk futures prices have struggled against increasing feed futures prices in the first half of the month. Commodity & Ingredient Hedging LLC’s (CIH) midmonth Dairy Margin Watch said the higher cheese production revealed in November’s Dairy Products report, combined with lower volumes of cheese going into USDA’s Farmers to Families Food Box program, caused cheese prices to plummet. Pizza sales may also have weakened, and cool weather and the reimplementation of COVID-19 restrictions will further dampen food service demand on various dairy products. Stocks of butter have grown as robust retail demand has not completely offset lost food service sales.

On the feed cost side of the ledger, corn and soybean meal futures were both higher following the USDA’s crop reports.

CIH noted one positive: The U.S. dollar recently fell to its lowest level in two months, providing a tailwind to U.S. dairy exports.

HighGround Dairy team members Lucas Fuess, Eric Meyer and Alyssa Badger shared a bearish update on market fundamentals and forecasts during their monthly webinar series, Nov. 16. Uncertainty over the holiday season, lower volumes of fluid milk going to schools, food service industry bankruptcies and anticipation of a strong spring flush in U.S. milk production are adding pressure on the price outlook. Feed costs will affect dairy producer breakeven and profitability pictures more than they have in recent years, they said.

Longer term, lots of cheese production capacity will be coming from a variety of locations in the Midwest. They include the ramp up of production at the Glanbia-DFA-Select plant in Michigan and growth further west from a First District facility at Litchfield, Minnesota, and an Agropur plant in South Dakota, both scheduled for early 2021.

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Increased cheese processing capacity has the potential to alter U.S. milk production and movement. There are already signs of production ramping up in Michigan, Indiana and into Ohio to supply the Michigan plant. The growth in Midwest capacity could draw Mideast milk that normally flows to the Southeast during lower seasonal milk production into cheese and pull more milk from the Southwest into the Southeast market.

Lending a glimmer of optimism to longer-term outlooks, rapid distribution of a COVID-19 vaccine will help. The forecast for stronger exports, especially to Southeast Asia and the possible recovery of the Mexican economy, are positives.

The HighGround team sees the new Biden administration switching to more traditional Supplemental Nutrition Assistance Program (SNAP) and the Women, Infants and Children (WIC) food assistance programs and away from the Farmers to Families Food Box program, although the food box program infrastructure will remain in place into 2022, allowing for a quick pivot if necessary.

Addressing an Ohio State University dairy outlook webinar, Mike McCully, owner and CEO of The McCully Group, said the U.S. has seen unprecedented volatility, particularly in the cheese market.

Citing factors similar to those mentioned mentioned above, McCully foresees softer milk prices in the first half of 2021, with some recovery after that fueled by a combination of lower low prices and higher feed prices taking a bite out of the milk production growth rate. He also expects some supply management (base excess) plans will be implemented next spring in many parts of the country to slow milk flow.

“I think the first half of the year is going to be pretty tough,” McCully said. “It's probably going to be breakeven or below breakeven in terms of overall milk prices. We're probably going to see some dairy farm margins squeezed pretty tight in the first part of the year.

One positive is that with federal assistance payments and stronger milk prices to end 2020, many producers may have a good cash cushion going into next year, which is going to help get through some of the tougher months early on, McCully said. He’s hearing of some producers deferring payments for year-end milk into the new year.

CFAP payment update

Whether direct financial assistance continues in 2021 will also depend on Congress and the Biden administration. With the election year over, many dairy analysts expect the payments to end. As of Nov. 15, payments to U.S. dairy farmers through both versions of the Coronavirus Food Assistance Program (CFAP) topped $2.75 billion.

  • CFAP 2 payments totaled $980.1 million to 18,541 applicants. Topping the list of states receiving dairy payments were: Wisconsin, $200.2 million; California, $134.8 million; New York, $102.5 million; Michigan, $58.1 million; and Minnesota, $56.4 million. The sign-up period is open through Dec. 11, 2020, at USDA FSA county offices.

  • CFAP 1 payments totaled $1.774 billion to 24,560 applicants. The application period closed Sept. 11; the USDA will finalize action on all CFAP 1 applications by Dec. 11.

Global Dairy Trade index moves higher

There was some good dairy market news this week. The index of Global Dairy Trade (GDT) dairy product prices rose 1.8% in the latest auction, held Nov. 17, despite a decline in the cheese price. A price summary of individual product categories follows:

  • Skim milk powder was up 2.5% to $2,799 per metric ton (MT).
  • Butter was up 0.4% to $3,838 per MT.
  • Whole milk powder was up 1.8% to $3,037 per MT.
  • Cheddar cheese was down 3.5% to $3,641 per MT.

The next GDT auction is Dec. 1.  end mark

Dave Natzke
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