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February margin ensures DMC payments will surpass 2019 premium costs

Progressive Dairyman Editor Dave Natzke Published on 01 April 2019

Enrollment in the Dairy Margin Coverage (DMC) program isn’t scheduled to start for another couple of months, but dairy farmers participating in the program at the top margin coverage level ($9.50 per hundredweight [cwt]) on the first 5 million pounds of milk will see their premium costs covered quickly.

The USDA confirmed a milk income over feed cost margin of $8.22 per cwt for February 2019, assuring an indemnity payment of about $1.28 per cwt on the monthly milk marketings for producers who select the $9.50 coverage level (Table 1). The USDA previously announced a January 2019 margin of $7.99 per cwt, yielding an indemnity payment of about $1.51 per cwt for the same producers.

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indemnity payment

That averages out to a DMC indemnity payment of about $1.395 per cwt on January-February milk marketings for producers who select the $9.50 coverage level.

Example herd

Taking the calculations further, an example dairy herd with annual production history of 3 million pounds of milk and electing to cover 95 percent of that milk (2.85 million pounds) would be eligible for payments on 2,375 hundredweights per month (2.85 million pounds divided by 100 divided by 12).

If protected at $9.50 per cwt, the 2,375 hundredweights would yield indemnity payments of $3,586 for January and $3,040 for February, for a total of $6,626. All indemnity payments are subject to a 6.6 percent sequestration deduction. Subtracting the sequestration deduction of about $438 for January-February, the two-month payment is about $6,189.

The premium for $9.50 margin coverage is 15 cents per cwt, or $4,275 for the full year. Thus, the example dairy would see a net return – above full-year premium costs – of $1,914 in January-February alone. (Producers who sign up for the full five-year length of the DMC program are eligible for another 25 percent discount on their premium, dropping it to 11.25 cents per cwt.)

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Market outlooks have been improving, but as of March 29, DMC margins were forecast to remain below $9.50 per cwt into August 2019.

February milk price up slightly

The February 2019 U.S. average milk price rose 20 cents per cwt from January to $16.80 per cwt and was $1.50 higher than February 2018. Florida’s average of $20.50 per cwt remained the nation’s high; the low was in $15 per cwt in New Mexico.

Compared to a month earlier, average milk prices were slightly higher in 20 of 23 major dairy states, led by a 50-cent increase in Iowa and 40 cents in Idaho (Table 2). Compared to a year earlier, February 2019 milk prices were up at least $2 per cwt or more in Arizona, Michigan, New York, Pennsylvania, Vermont and Virginia.

milk prices

What if? New ‘dairy hay’ information

In an effort to more accurately calculate dairy farmer feed costs under federal dairy safety net programs, the 2018 Farm Bill mandated the USDA to begin reporting average “dairy quality” hay prices in the top five milk-producing states. USDA’s National Ag Statistics Service began reporting prices for Premium and Supreme alfalfa hay with the latest monthly Ag Prices report, released March 28. The report actually lists hay prices in seven states and an average for the top five: California, Idaho, New York, Texas and Wisconsin (Table 3).

Based on those prices, January and February 2019 dairy quality hay prices averaged $221 and $225 per ton, respectively. That compares to $181 and $180 per ton for all alfalfa hay during the same two months.

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hay prices

It’s only a “what if?” scenario, but if that average of high-quality alfalfa prices was incorporated into the milk income over feed cost margin under the new DMC program, what would the impact be?

First, a review. A carryover from the Margin Protection Program for Dairy (MPP-Dairy), the DMC average feed cost for each month is calculated by summing three numbers:

1. the corn price per bushel times 1.0728, plus

2. the soybean meal price per ton times 0.00735

3. the alfalfa hay price per ton times 0.0137.

Under that formula, the U.S. average alfalfa hay price of $180 per ton in February creates a DMC dairy ration hay price factor of $2.47 per cwt. If the higher “dairy-quality” alfalfa hay price was used in DMC calculations, it would have raised the hay price factor another 62 cents to $3.08 per cwt.

The January 2019 U.S. average alfalfa hay price of $181 per ton (DMC hay price factor of $2.48), while the dairy quality hay price averaged $221 per ton ($3.03 hay price factor), a difference of 55 cents per cwt.

As noted, the USDA previously announced a January 2019 margin of $7.99 per cwt, but the higher hay price would have cut that to $7.44 per cwt. That would have translated into a January DMC payment of $2.06 per cwt for a producer insured at the $9.50 per cwt level.

Similarly, using the higher hay price, the February announced margin of $8.22 per cwt would have fallen 62 cents to $7.60 per cwt, resulting in a DMC indemnity payment of $1.90 per cwt for a producer insured at the $9.50 per cwt level.

To be clear, the new dairy-quality hay prices are not part of the DMC calculations. They do, however, help call attention to higher feed costs than those using the U.S. average alfalfa hay price.  end mark

Dave Natzke
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