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July DMC margin tops $12.40, but negative PPDs again hidden factor

Progressive Dairy Editor Dave Natzke Published on 31 August 2020

Higher July U.S. average milk prices and slightly lower feed costs resulted in another large jump in the dairy income margin calculated under the Dairy Margin Coverage (DMC) program. As in June, however, negative producer price differentials (PPDs) under the Federal Milk Marketing Order (FMMO) system – not included in risk management program calculations – mean the announced prices or margins may not reflect what producers see at the farmgate.

July DMC margin: $12.41 per cwt

The USDA released its latest Ag Prices report on Aug. 28, including factors used to calculate DMC margins and payments. Based on USDA numbers, the July DMC margin is estimated at $12.41 per hundredweight (cwt), up $2.42 per cwt from June and $7.04 per cwt more than May.

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The margin is the largest under DMC or its predecessor, the Margin Protection Program for Dairy (MPP-Dairy), since September-October 2014.

There will not be any indemnity payments for any insured level (Table 1) for July.

083120 natzke dmc tbl1

Milk prices higher

The July 2020 announced U.S. average milk price increased to $20.50 per cwt, up $2.40 from June’s average of $18.10 per cwt (Table 2). Year to date, the U.S. average milk price is $17.59 per cwt, on par with average prices in 2019 and 2017 over the same seven-month period.

083120 natzke dmc tbl2

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Compared to a month earlier, milk prices rose in all major dairy states, but the increases varied widely. Largest month-to-month increases were in the high Class I utilization states of Georgia, Florida and Virginia, which played catch-up from last month. The smallest increase from June was In Arizona.

July prices were more than $25 per cwt in South Dakota and Oregon and above $23 per cwt in Iowa and Minnesota. Lowest announced prices were in Arizona ($16.30 per cwt), with Michigan and Colorado at $17 per cwt.

The July all-milk prices announced by the USDA again probably don’t reflect what most dairy farmers saw in their milk checks. Among the seven FMMOs utilizing multiple component pricing formulas, PPDs ranged between -$4.86 in the Upper Midwest to -$10 per cwt in parts of California. That resulted in substantial milk check deductions for some producers.

Read: July negative PPDs: Second verse similar to the first and Lack of DMC payments does not reflect dairy farmers’ difficulties.

Hay prices drop; corn and soybean meal mostly steady

Compared with June, July feed costs were virtually unchanged, with lower hay prices offsetting small increases in corn and soybean meal.

The average price for a blend of premium and all alfalfa hay used in DMC calculation was $183 per ton, down $7 per ton from June. The July 2020 U.S. average corn price was $3.21 per bushel, up a nickel from the month before; soybean meal averaged $291.25 per ton, up $2.59 cents per ton from June. That yielded an average DMC total feed cost of $8.09 per cwt of milk sold, down just 2 cents from June (Table 3).

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 083120 natzke dmc tbl3

Margins headed lower

Projected DMC margins are now headed lower. Based on milk and feed futures prices at the close of trading on Aug. 28, the DMC Decision Tool estimates margins are likely to slip to $10.75 per cwt in August, and there may even be indemnity payments at the highest insurable margin of $9.50 per cwt in September, when margins are forecast to fall to about $9.30 per cwt.

After that, monthly DMC margins are projected above the $9.50 threshold until February 2021.

Current forecasts predict negative PPDs could affect uniform milk prices paid through FMMOs on August milk marketings, although the impact will likely be substantially lower than June and July.

In June, the USDA announced the enrollment period for the 2021 DMC program will be held Oct. 12-Dec. 11, 2020, through Farm Service Agency (FSA) offices. Read: 3 Open Minutes with Richard Fordyce: 2021 Dairy Margin Coverage program  end mark

Dave Natzke
  • Dave Natzke

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  • Progressive Dairy
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