Focus on Ag: New DMC program offers hope for dairy producers

The financial struggles of family dairy farms in recent years across Minnesota, Wisconsin, and other states has been well documented. There has been a large loss of dairy operations in these regions of the U.S. in the past few years, due to the ongoing economic challenges in the dairy industry. The 2018 Farm Bill created the Dairy Margin Coverage (DMC) program as a safety-net program for dairy producers for 2019-2023, which may offer some hope in the future for the small-to-medium size dairy producers. Sign-up for the new DMC program began on June 17, 2019 and will continue until September 20, 2019 at local FSA offices. DMC payments are scheduled to begin after July 8, 2019, and DMC payments to eligible dairy producers will be made retroactively back to January 1, 2019.

The DMC program is a voluntary program, which is “margin based” with calculations based on the income over feed cost margins on a monthly basis. The DMC program requires dairy producers to choose production and price coverage levels at various premium rates. There were some fairly significant improvements in the DMC program as a “safety-net” and risk management program for dairy producers, in comparison to the previous Market Protection Program (MPP) in the 2014 Farm Bill. There is especially enhanced risk protection for those producers for smaller-sized dairy herds under 250 cows; however, the DMC program also provides more flexibility for larger dairy operations.

Following are highlights of the new DMC program (compared to the previous MPP program):

• Dairy producers now have a coverage level choice up to 95 percent of production history. (MPP maximum coverage level was capped at 90 percent of production history.)

• Three new Tier 1 price coverage levels of $8.50/cwt., $9.00/cwt., and $9.50/cwt. (MPP top price coverage level was $8.00/cwt.)

• Tier 1 DMC coverage goes up to 5 million pounds of production (approx. 200-230 cows). (MPP Tier 1 maximum was 4 million pounds.)

• Provides a 25 percent premium discount for dairy producers that make a one-time 5-year (2019-2023) enrollment into the DMC program. No premium repayment required if producers exit the business early.

• DMC premiums are more affordable than with the original MPP. Producers can purchase the $9.50/cwt. coverage for an annual premium of $.15/cwt., which is reduced to $.1125/cwt. when utilizing the premium discount. The DMC premium for $8.00/cwt. coverage is $.10/cwt., or $.075/cwt. with the premium discount. (Premium was $.142/cwt. under the MPP program.)

• Dairy producers may enroll in both the DMC program and either the Livestock Gross Margin (LGM) or Dairy Revenue Protection (RP) program, which are RMA insurance programs. (With MPP, producers had to choose either MPP or LGM coverage, but could not enroll in both.)

The Minnesota DAIRI Program

The Minnesota Legislature approved legislation to partially rebate dairy producers for the premium costs of the DMC program. The Dairy Assistance, Investment, and Relief Initiative (DAIRI) program authorizes up to $8 million to assist Minnesota dairy farmers with the DMC premiums for 2019, the first year of the program. The DAIRI program will cover the first 5 million pounds of historical annual milk production (Tier 1 coverage) and will be capped at $9,000 per farm. Dairy farms with annual production above 16 million pounds (approx. 750 cows) will not be eligible for the program; however, it is estimated that about 98% of Minnesota dairy farms will be eligible. In order to be eligible, producers must sign-up for all 5 years of the DMC program (through 2023) at their local FSA office, and must provide proof of DMC sign-up with their DAIRI application. For more information, refer to the MN Department of Ag DAIRI web site at: https://www.mda.state.mn.us/dairi

Impacts of the Higher DMC Tier 1 Price Coverage

Under MPP, many dairy producers selected Tier 1 coverage at either the $6.50 or $8.00 per hundredweight coverage levels for 2015 to 2018. Based on USDA data, MPP payments only occurred in 4 percent of the months during that time period at the $6.50/cwt., and in 41 percent of the months at the $8.00/cwt. level. The DMC program now offers higher price coverage level options of $8.50, $9.00, and $9.50 per hundredweight. Had the DMC program been in place from 2015 to 2018, DMC payments would have occurred in 52 percent of the months at $8.50/cwt.; 63 percent at $9.00/cwt.; and 80 percent of the months at $9.50/cwt.

The maximum DMC coverage price is $9.50 per hundredweight, which is 117 percent above average MPP/DMC margin over the past ten years of $8.11 per hundredweight. The average MPP/DMC margin over the past five years has been $9.51 per hundredweight, which correlates to the new maximum DMC price coverage level. It should be noted that the 5-year average was more impacted by the record high margin level in 2014. Past price margins are not necessarily a predictor of future DMC program payments; however, based on current trends in the margins, the $9.50 per hundredweight level should provide a considerably improved safety-net.

Preliminary 2019 DMC Results

As was mentioned earlier, the 2019 DMC payments will be retroactive back to January 1, 2019, once they begin in July of 2019. The DMC payments are calculated on a monthly basis, so we already have the results for January, February, and March of 2019. Based on the DMC income over feed cost formula, the DMC payments for the first three months of 2019 would be: January = $1.51/cwt.; Feb. = $1.28/cwt.; March = $ .65/cwt.

Examples follow:

• Dairy herd producing approx. 3 million pounds per year (30,000 cwt.), or 2,500 cwt. per month. (Equates to a dairy herd of approx. 125 cows.)

• DMC payment formula = Monthly Payment Rate x % Coverage x Monthly Ave. Production (Example = $1.51/cwt. x 2,500 cwt. x 95% (.95) = $3,586.25 DMC payment).

• Estimated 2019 DMC payments for the example herd (3 million pounds annual production): January = $3,586.25; Feb. = $3,040.00; March = $1,543.75; Total = $8,170.00 (First 3 months, 2019). Note: DMC payments will be subject to a Federal sequestration payment reduction of 6.2 percent.

• DMC Premium Formula = Annual Production x % Coverage x Premium Rate. (Example = 30,000 cwt. x .95 (28,500 cwt.) x $.15/cwt. = $4,275 Annual DMC Premium). Note: There is a 25 percent premium reduction for 5-year DMC enrollment.

Minnesota dairy producers are also eligible for the special DAIRI premium rebate program.

For further assistance, dairy producers should refer to the USDA DMC web-based decision tool at: https://www.fsa.usda.gov/programs-and-services/farm-bill/farm-safety-net/dairy-programs/mpp-decision-tool/index.

The combination of the enhanced price risk protection available under the new DMC program, along with the added DMC premium incentives, make enrollment in the DMC program for 2019-2023 look quite attractive for small to medium sized dairy farms that plan to continue in operation. This decision is further strengthened by the fact that the announced DMC payment levels for the first three months (Jan., Feb. & March) of 2019 will be nearly double the 2019 premium levels for entire 2019 year. Of course, many Minnesota dairy farmers may have their 2019 DMC premiums reduced even more by the new DAIRI program. It’s hard to predict what will happen to dairy prices and margins for the entire 5-year period (through 2023) of the DMC program, but “out of the gate”, the DMC program looks like a greatly improved risk management tool for smaller dairy producers.