Well over half the dairy farms in the U.S. enrolled in the Dairy Margin Coverage program for 2021.
DMC is the U.S. Department of Agriculture’s voluntary risk management program that offers protection to dairy producers when the difference between the all-milk price and the average feed price (the margin) falls below a certain dollar amount selected by the producer. More than 23,000 operations enrolled in DMC in 2019, and more than 13,000 in 2020, according to USDA data.
“This year has been a market roller coaster for the dairy industry, and the Dairy Margin Coverage program is a valuable tool dairy producers can use to manage risk,” said Bill Northey, USDA’s under secretary for farm production and conservation.
Despite USDA officials raising some concerns in November that not enough dairy producers were enrolled, 68% of the country’s dairy farms signed up for DMC coverage for 2021 before the Dec. 11 deadline. That’s compared to just over 50% enrollment in 2020.
“That is a good number,” Marin Bozic said.
Bozic, who conducts research at the University of Minnesota on dairy risk management and dairy policy and teaches courses on agribusiness finance and risk management is an expert on the Dairy Margin Coverage program. He said the DMC program has now paid out generously in 2019 and 2020.
“We have a little bit of a real history to rely on, not just the simulations.” he said. “And I think producers are reacting to that.”
Bozic and Mark Stephenson at University of Wisconsin-Madison partnered with the USDA to upgrade the tool in recent months, to help producers choose a level of coverage that fits their unique risk management needs. With the tool, producers can see how different coverage levels correspond to milk price floors given the projected feed costs.
He said in previous years they noticed that producers used the tool to try to get a sense of whether the program would pay out more than they pay in for premiums.
“The problem with that approach is that nobody sees a black swan, which by definition is something that is unexpected and escaping all forecasts,” Bozic said.
He said they worked with state ag departments and FSA offices to reimagine the tool to include historical analysis that shows what DMC payments might have been had the program existed over the last two decades.
Uncertainty ahead
Concerns from the dairy industry start with the obvious, said Bozic, which is that we don’t know how long and how bad the pandemic is going to be. Things are expected to start turning back to normal in the summer and food service industries should make a return. But that’s still six months away.
Bozic also has concerns about the ramifications that may come from the help that has reached dairy throughout the pandemic, directly through the Coronavirus Food Assistance Programs and indirectly through other aid programs. Those forms of assistance have “moved the needle on the pace of growth” of milk supply, he said.
“We have now hit a few months in a row where milk supply is growing over 2%, with the latest month at 3%,” Bozic said. “That’s a huge growth in milk production, and should that continue, we are going to have oversupply issues in 2021.”
While past and future COVID-related assistance for dairy producers is seen as the ethical response from the federal government, Bozic said it “mutes market signals,” which exist to “tell you what the profitable thing to do is.”
“When government help is manifested as a form of generous direct payments, that is going to have an effect on the number of milking cows in the country and peoples’ desire to expand,” he said.
Bozic said between large expansions in cheese processing capacity in Michigan as well as some in Minnesota, and strong growth in milk supply in multiple states, there’s worry for the latter part of 2021.
“We are either going to be an export superpower of cheese in 2021, or we are going to see some cheese prices we won’t necessarily like,” he said.
The DMC will help counter that, said Bozic, especially when it’s complimented with other risk management tools like Livestock Gross Margin for Dairy Cattle and Dairy Revenue Protection.
“Not doing anything is not something I would recommend, giving the projected fundamentals for 2021,” he said.
