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May-June dairy risk management calendar: Participation levels examined

Progressive Dairy Editor Dave Natzke Published on 23 May 2022

Progressive Dairy provides monthly online updates of important dates, reports and advice affecting risk management decisions.

Wondering about what risk management tools your fellow dairy producers are using? Writing in an American Farm Bureau Federation Market Intel report, staff economist Dan Munch provided a look at two popular programs, Dairy Revenue Protection (Dairy-RP) and Livestock Gross Margin for Dairy (LGM-Dairy).

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Over the three-year period of 2019-21, the number of Dairy-RP policies sold increased 43%. Participation so far in 2022 has nearly exceeded those in 2021, with more than half the year remaining.

By state, Wisconsin had the most 2021 Dairy-RP policies with 1,466, followed by Minnesota (757), California (488) and New York (377). Participation in 2022, so far, is currently only 156 policies behind last year, with the largest net gains in California (+56), Iowa (+25) and Texas (+11). The geographic distribution of Dairy-RP policies in 2021 found significant concentrations in heavy milk production counties across the upper Midwest and California. Other high milk producing states like New York, Pennsylvania, Idaho, Washington and New Mexico also hold significant participation.

Looking at LGM-Dairy participation and utilization statistics over the past five years (2017-22 to date), Munch said there are few discernable participation trends. Overall, participation in LGM-Dairy shows a fairly stable base of users who have found benefits in using the programs' unique bundle hedging approach under short- or longer-term, highly customizable contracts.

Policies sold ranged between a low of 1,067 in 2018 and high of 1,622 in 2017, with 2022 at 1,355 so far. This represents a fourth of the Dairy-RP policies sold this year. Looking at geographic distribution, 2021 sales of LGM-Dairy were almost exclusively in Upper Midwest states, likely revealing comfort in utilizing Class III milk prices. Wisconsin had the most policies sold with 872, or 64% of all LGM-Dairy policies sold last year, followed by Minnesota (268) and Michigan (118). Between 2021 and 2022, the largest increase in policies sold occurred in Wisconsin (+144) and Michigan (+22), while the largest drops occurred in Florida (-26) and Ohio (-5).

The number of counties with active LGM-Dairy policyholders has declined by about 40% since 2017, although the percent of total U.S. milk production insured has hovered between 0.74% and 1.15% during the same time frame. The 1.98 billion pounds insured this year under LGM-Dairy is only about 0.05% of volume insured under Dairy-RP, with the average volume insured also much smaller at 1.59 million pounds versus 8.6 million under Dairy-RP.

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To read the complete analysis, read: Reviewing participation in dairy risk management programs.

Policy reminders

At any one time, Dairy-RP sales are open for as many as five future quarters. Sales close 15 days before the beginning of the quarter. For example, the period to purchase Dairy-RP coverage for the third quarter of 2022 closes on June 15. The market changes daily and Dairy-RP endorsements must be purchased between the CME market closing and the next CME opening.

Dairy-RP coverage cannot be purchased on days when major USDA dairy reports are released that could impact markets, including Milk Production, Cold Storage and Dairy Product reports (see calendar). Dairy-RP is also not available on days when applicable futures contracts move limit-up or limit-down, or on days when Chicago Mercantile Exchange trading is closed due to holidays.

Sales periods for the LGM-Dairy program are open on a weekly basis. Unlike Dairy-RP, LGM-Dairy is available even if a sales period falls on the day of a USDA report.

051722 natkze risk management calendar preview

Click here or on the calendar above to view it at full size in a new window.

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Dairy-RP adding ‘natural disaster’ coverage flexibility

In February, the Federal Crop Insurance Corporation approved revisions to several insurance plans, including Dairy-RP, LGM and Livestock Revenue Protection (LRP) plans. The revisions are applicable for the 2023 USDA crop insurance year, beginning July 1, 2022, and succeeding crop years.

Dairy producers using the USDA Risk Management Agency (RMA) Dairy-RP program will have an additional income safety net covering milk production losses due to natural disasters, such as a tornado or fire. Other natural disasters that could be included would be floods, severe storm damage or earthquakes.

Under Dairy-RP, producers are obligated to market 85% of the covered milk volume or 90% of the components to receive full indemnity payments. In event of a natural disaster, however, those thresholds may not be reached.

The provision does not insure against the death or other loss or destruction of dairy cattle. Additionally, any impact to herd health that affects milk production would need to be tied to the natural disaster.

For more information, read: Dairy-RP adding ‘natural disaster’ coverage flexibility.

DMC update

Seemingly in a race to the top, record-high milk prices surpassed record-high feed costs in March to help buffer dairy producer milk income margins calculated under the Dairy Margin Coverage (DMC) program. The March DMC margin was $11.55 per hundredweight (cwt), above the top Tier I insurable level of $9.50 per cwt.

The March 2022 announced U.S. average milk price rose $1.20 from February to $25.90 per cwt, a new record high. Offsetting part of the increase in the average milk price were skyrocketing average costs for alfalfa hay, corn and soybean meal.

Read: Milk price rise outpaces feed costs in March DMC margin.

April’s DMC margin will be announced on May 31.

USDA milk production report, outlook

Monthly U.S. milk production was below year-ago levels for a fourth consecutive month in April, with cow numbers lower than a year earlier and output per cow unchanged.

Preliminary April U.S. cow numbers were unchanged from March. However, March estimates were revised upward by 7,000 head from last month’s preliminary report and are up 35,000 head from January. April 2022 U.S. cow numbers are still down about 105,000 head from the peak in May 2021.

Read: April 2022 milk production down from a year ago.

The USDA’s monthly World Ag Supply and Demand Estimates (WASDE) report, released May 12, revised the 2022 U.S. milk production estimate upward, with higher milk cow inventories more than offsetting slower growth in milk per cow. With the increased production, the outlook for farm-level milk prices was steady to only slightly lower.

Compared to last month, the USDA raised the 2022 milk production forecast by another 400 million pounds to 226.7 billion pounds. If realized, 2022 production would be up just 0.2% from 2021. The projected annual average Class III price was unchanged from last month at $22.75 per cwt. The projected Class IV price was reduced 25 cents to $23.80 per cwt. The 2022 all-milk price forecast was lowered a nickel to $25.75 per cwt.

In its initial look into 2023, the USDA projected milk production at 229.5 billion pounds, up about 1.2% from the 2022 estimate. Annual average price projections for 2023 were: Class III – $20.50 per cwt, Class IV – $21.40 per cwt and all-milk – $23.55 per cwt.

For more, read Economic outlook: Higher 2022 milk production forecast has small impact on projected prices.

Other resources

  • Zach Myers, risk education manager with the Pennsylvania Center for Dairy Excellence (CDE), will host the next “Protecting Your Profits” webinar, May 25, 12-1 p.m. (Eastern time).

Myers will highlight the latest Class III and IV futures milk price forecasts and share updates on DMC margins and the Dairy-RP program.

Advance registration is not necessary. Each webinar is available via podcast or phone. To participate, click here or phone: (646) 558-8656. When prompted, enter meeting ID 848 3416 1708 and passcode 474057.

  • Federal Milk Marketing Order (FMMO) uniform price and producer price differentials for April milk marketings were released, May 10-13. April 2022 uniform milk prices were up as more high-valued Class IV milk started coming back to the pools. Prices paid to producers are at record highs but are likely nearing their peaks.

Read: Class IV coming back to the pool, helping float uniform prices near record highs.  end mark

Dave Natzke
  • Dave Natzke

  • Editor
  • Progressive Dairy
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