Agriculture’s role in providing food security, and in turn national security, to the United States is more important than ever. And now, work on the next farm bill has started during a period of volatility on every front – political, economic, weather and beyond.
Milk production remains an integral piece of agricultural production in the United States, accounting for nearly 10% ($42 billion) of all agricultural receipts in 2021 (not including the beef value of dairy animals). With wild market disruptions and supply chain shortfalls underpinning milk price volatility most of the past five years, understanding the farm bill provisions intended to prevent further dairy farm closures is vital.
Dairy Margin Coverage (DMC)
Title I, known as the “commodity title,” authorizes commodity support programs for 2019-2023, including the Dairy Margin Coverage (DMC) program. DMC exists to provide risk protection to dairy producers when milk prices are low and/or feed costs, on average, are high. Unlike other dairy risk management programs, like Dairy Revenue Protection (DRP) or Livestock Gross Margin Dairy (LGM-Dairy), this program is administered directly through USDA’s Farm Service Agency instead of private crop insurance providers. It is completely voluntary and provides payments when the calculated national margin falls below a producer’s selected coverage trigger. The margin is the difference between the average price of feedstuffs (the price of a mix of high-quality alfalfa hay, corn and soybean meal) and the national all-milk price.
To fully understand the status of DMC today we must dive into its relatively recent but complex history. The DMC program is a result of multiple revisions and improvements to the previous Margin Protection Program (MPP), originally authorized in the 2014 farm bill. Enrollees in MPP paid a $100 annual administration fee for catastrophic coverage whenever the margin fell below $4/cwt for a two-month period. Farmers with catastrophic coverage would then receive payments equal to the difference between the national margin and $4/cwt, applied to 90% of their milk production history. MPP production history was defined as the highest annual quantity of milk marketed during 2011-2013, adjusted annually for a national increase in milk production.
In its preliminary form, MPP enrollees could also purchase buy-up coverage for a premium in 50-cent increments from $4.50/cwt to $8/cwt, which provided coverage for the corresponding margin. Premiums were split into two separate tiers. Tier One included premiums for protection of milk on the first 4 million pounds while Tier Two applied to production over 4 million pounds. Participants can then choose to cover 25% to 90% of their production history. During its 2015 initial offerings, 44% of participants and 62% of the covered production chose the catastrophic option. The percentage of participants selecting the catastrophic option only increased in subsequent years as premiums were set to increase. This resulted in 93% of producers and 98% of milk volume being enrolled at the minimum level by 2017. These participation dynamics lead to minimal payouts in the program — $10 million in 2016 and only $19,000 in 2017.
With dairy producers frustrated with the program, some minor changes were made in the Bipartisan Budget Act of 2018. This included the increase in Tier 1 coverage to up to 5 million pounds. Margin calculations were also calculated monthly instead of every two months and Tier 1 premiums were reduced. Additional changes were made with the passage of the 2018 farm bill, which replaced MPP with DMC. The following bullets summarize these changes as noted by the Congressional Research Service:
- Catastrophic coverage for both Tier 1 and Tier 2 was set at $4/cwt, but it was made available on 95% of a farm’s production history, compared with 90% under MPP, and remained available for a $100 enrollment fee.
- Farms could elect to cover between 5% and 95% of their milk production history with buy-up premiums, compared with 25% to 90% under MPP.
- Farms could purchase buy-up coverage for margin thresholds ranging from $4/cwt to $9.50/cwt under Tier 1 coverage, compared with a range of $4/cwt to $8/cwt under MPP. Tier 2 premiums applied to coverage exceeding 5 million pounds of covered production history, and still provided coverage for margin thresholds ranging from $4/cwt to $8/cwt.
- Buy-up premiums were restructured under DMC; Tier 1 premiums were reduced from levels in MPP-Dairy, while Tier 2 premiums were reduced at lower margin coverage levels and increased at higher margin coverage levels (Table 1).
- The average national margin continued to be calculated monthly, as it had been calculated under the BBA of 2018.
- Registration fees were waived for certain classes of producers, and refunds of MPP premiums were to be paid retroactively to most enrollees.
- Removed the prohibition on dairy farmers participating in both a margin program and LGM-Dairy insurance program.
In 2020, under the Consolidated Appropriations Act, Supplemental DMC (SDMC) based on 75% of the difference between 2019 marketings and the old base calculation (2011-2013 milk marketings) number was passed into law. The new policy allows operations to opt for higher milk production coverage if changes to herd size were made since the 2011-2013 basis years (within the 5-million-pound limitation). For this expansion of coverage, $580 million has been set aside by USDA. It will apply to the 2021 (retroactively), 2022 and 2023 calendar years. After making any revisions to production history under SDMC, producers were able to apply for 2022 traditional DMC coverage. This means future DMC contracts will include the updated production history figures that account for 2019 marketings. This expansion of coverage is not in place past 2023.
Additionally, the Farm Service Agency adjusted the calculation of alfalfa within the factored average feed costs figure using 100% premium alfalfa hay rather than 50%, in hopes of making future DMC payments more reflective of dairy expenses. This change reduced DMC milk margins by an average of 22 cents/cwt a month, linked to the updated alfalfa price being an average of $15.95/ton higher in the formula for 2021. For example, in October 2021, the DMC margin dropped from $8.77/cwt to $8.54/cwt under the adjustment. This will allow enrolled producers to retroactively recoup payments they would have qualified for under the feed cost formula change – if the difference was large enough to trigger a higher payment level covered under their plan.
Currently, producers are considering what further changes can be made to DMC under the next farm bill to make the program even more reflective of current market conditions without losing its effectiveness. Some are concerned that the 5-million-pound Tier 1 limitation no longer represents the average dairy farm in the United States, while others are hoping for more regular updates to production history reference points. Concern that only feed costs are captured in the margin calculation have also been aired as producers face many other cost increases like those for labor, fuel and equipment. In any case, DMC remains a widely utilized program authorized by the farm bill. Participation trends in DMC since its 2019 debut can be viewed here. In 2021, 74% of all farms with production history were participating in the program, which paid out over $1.1 billion due to diminished margins.
Dairy Forward Pricing Program (DFPP)
The Dairy Forward Pricing Program allows milk handlers to pay producers or cooperatives a negotiated price for producer milk, rather than the federal order minimum blend price for non-fluid classes of milk (Class II, III, IV). It does not allow for forward contracting of fluid milk (Class I), though this is defined rather flexibly. The program is voluntary for dairy farmers, cooperatives and handlers; handlers cannot require producer participation in a forward pricing program in order to accept milk. Regulated handlers must still account to the Federal Milk Marketing Order pool for the classified use value of their milk. Each forward contract made under the program must be submitted to the regional market administration and contain a disclosure to ensure producers understand the program and the method in which they would be paid. Prior to the 2018 farm bill, the DFPP expired on Sept. 30, 2018, meaning new contracts under the program were prohibited. The 2018 bill reauthorized the program to allow handlers to enter into new contracts until Sept. 30, 2023, for milk delivered through 2026.
Dairy Indemnity Payment Program (DIPP)
The Dairy Indemnity Payment Program (DIPP) allows the Secretary of Agriculture to indemnify affected farmers and manufacturers of dairy products who, through no fault of their own, suffer income losses with respect to milk or milk products containing harmful pesticide residues, chemicals, or toxic substances, or that were contaminated by nuclear radiation or fallout. The program was extended under the 2018 farm bill until Sept. 30, 2023.
The 2020 Consolidated Appropriations Act amended the regulations for DIPP to indemnify affected farmers for depopulating and permanently removing cows after discovery of chemical residues affecting the commercial marketing of milk for the applicable farm and likely affecting the marketability of cows for a lengthy duration. This includes elevated levels of perfluoroalkyl and polyfluoroalkyl substances (PFAS) that are of growing concern across the United States. The amendment limits indemnification of milk due to chemical residues to three months to monitor chemical levels – removing the cows from production during that time. The indemnification of cows when the cows are likely not to be marketable for three months or longer is new to DIPP. Bred (young dairy female in gestation) and open (young dairy female not in gestation) heifers that are not marketable due to elevated levels of chemical residues as the result of the same loss are eligible for cow indemnification through DIPP. Affected farmers have the choice to receive 50% of cow indemnification after application approval and the remaining 50% after the cows are depopulated and removed or 100% after the cows are depopulated and removed. Once approved for cow indemnification, the affected farmers will dry off the affected lactating dairy cows to stop further milk production. Affected farmers approved for indemnification of cows who subsequently restock the original farm with new dairy cows and commercially market milk at the original location of contamination are not eligible for DIPP indemnification for any future loss from the same contamination.
DIPP should not be confused with the Livestock Indemnity Program (LIP) since chemical residues are not an eligible cause of loss under LIP.
Milk Donation Reimbursement Program (MDRP)
Under the Milk Donation Reimbursement Program, dairy organizations that participate in federal order pools and incur expenses related to fluid milk product donations may apply and receive partial reimbursement to cover some of those expenses. Specifically, eligible handlers who account to an FMMO pool and donate packaged fluid milk products to eligible nonprofit organizations may claim reimbursements for all or part of the FMMO cost difference between the Class I value and the plant and the lowest classified value for the month. Handlers cannot claim reimbursement for other costs related to donating fluid milk such as processing, bottling and transporting the donated milk. MDRP is meant to encourage handlers to make donations to food assistance programs and reduce food waste.
The 2014 farm bill authorized the Secretary of Agriculture to create a program to reimburse eligible dairy organizations for a portion of the value of fluid milk products they donate. The program was to be administered through the Agricultural Marketing Service (AMS). In response, in 2014, the Dairy Product Donation Program was established but was subsequently repealed and replaced in the 2018 farm bill by MDRP. Congress allotted $9 million for the first year (2019) of the program and $5 million for each of the following years.
(DDP) Dairy Donation Program (DDP)
The Dairy Donation Program was established as required by the Consolidated Appropriations Act of 2021 in response to increased prevalence of dumped milk during the early days of the COVID-19 pandemic. Under the program, eligible dairy organizations that account to an FMMO and incur qualified expenses related to certain dairy product donations may apply for and receive reimbursements for those donations. Qualified expenses are incurred by either purchasing fresh fluid milk products for processing into an eligible product or purchasing bulk dairy commodity product for further processing. Like MDRP, this program is intended to facilitate donations of eligible dairy products and prevent and minimize food waste. It was also meant to help balance the supply chain during pandemic recovery. Congress authorized $400 million until expended for the DDP.
The DDP is an additional dairy donation program that overlays existing USDA dairy donation activities such as the MDRP but differs in that in covers more than just fluid milk donations. To qualify under the program eligible dairy products must:
- Be made primarily from cow’s (bovine) milk produced in the United States;
- Be packaged in consumer-sized packaging;
- Meet the applicable standards for dairy products in the Federal Food, Drug, and Cosmetic Act as amended;
- Have a sell-by, best-by, or use-by date no sooner than 12 days from the date the eligible dairy product is delivered to the eligible distributor.
Program provisions specify donated dairy products mut be in consumer-sized packaging. This provision should be interpreted by the eligible partnership as to whatever consumer-sized package format is agreeable to both partners.
Although program funds for DDP and MDRP are statutorily prohibited from being consolidated, the two programs operate as one from a stakeholder standpoint. Dairy organizations making Class I fluid milk product donations—which are covered by both programs—will be reimbursed through MDRP funds at the difference between the Class I and lowest classified price and receive a supplemental reimbursement of the lowest classified price plus the manufacturing and transportation cost reimbursement through DDP funds. Total combined reimbursement will be capped at the Class I price in Dade County, Florida.
Dairy organizations already enrolled in MDRP will automatically be enrolled in DDP and qualify to receive supplementary payments for fluid milk products donated under their currently approved MDRP plans. As of July 2022 there were 30 eligible dairy organizations approved by the USDA. Four are in the Western region, six are in the Central West region, 12 are in the Central East region and eight are in the Eastern region. The map below displays which states are categorized under which region.
Table 2 summarizes the reimbursement value by product for DDP and MDRP between October 2019 and the end of June 2022. During this timeframe, nearly $4 million in reimbursements have been made and over 15 million pounds of product donated. Note this is only a small fraction of the authorized $400 million amount.
USDA clarifies that DDP and MDRP are separate and distinct from the USDA safety net program (Dairy Margin Coverage), indemnity and disaster assistance programs, risk management tools through the public-private partnership of the Federal Crop Insurance Program, or USDA purchases of commodities, which may include dairy products, depending on the market conditions and demand from school lunch or nutrition programs.
Dairy Business Innovation (DBI) Initiatives
The Dairy Business Innovation (DBI) initiatives were authorized under the 2018 farm bill to support dairy businesses in the development, production, marketing and distribution of dairy products. At first, the program awarded grants to three initiatives, one at the University of Tennessee, one at the Vermont Agency of Food & Markets and one at the University of Wisconsin. Each initiative provides technical assistance to dairy businesses and uses at least 50% of the award for subawards to dairy businesses, including makers of niche dairy products, such as specialty cheese, or producers of dairy products derived from the milk of a dairy animal, including cow, sheep, and goat milk. The percentage used by DBI initiatives themselves must specifically focus on one of the following items:
- Diversifying dairy product markets to reduce risk and develop higher value uses for dairy products.
- Promoting business development that diversifies farmer income through processing and marketing innovation.
- Encouraging the use of regional milk production.
Table 3 displays the outlays for DBI initiatives between fiscal years 2019-2021. Note, in November 2021 the Agricultural Marketing Service announced additional funding for a new, fourth initiative at California State University Fresno Foundation.
On March 2, 2022, USDA announced the availability of an additional $80 million for DBI initiatives through the American Rescue Plan to further support processing capacity expansion, on-farm improvements and technical assistance to producers. Additionally, $22.9 million was announced for fiscal year 2022 appropriations to support the same initiatives. Information on the four current DBI initiatives can be found here.
Other Considerations
Since the 2018 farm bill, the price for Class I milk, i.e., milk used to produce beverage milk products, has been calculated using the simple average of advanced Class III (cheese) and Class IV (milk powders) skim milk prices plus 74 cents. In years prior, the formula was the higher of advanced Class III and Class IV skim milk prices. The legislative change was made at the request of dairy industry stakeholders and was intended to improve risk management opportunities for beverage milk. COVID-19-induced volatility combined with the 2018 farm bill formula change resulted in hundreds of millions of dollars in Class I pool revenue losses compared to the old formula, renewing industry discussions on optimal Class I pricing methods. This has fueled much recent conversation about whether the pricing change made in the 2018 farm bill has been helpful to dairy farmers. Between July and December 2020, the formula change resulted in $744 million less in the federal order pool, causing widespread negative producer price differentials. USDA provided a buffer to these losses through the Pandemic Market Volatility Assistance Program (PMVAP), which provided $350 million in pandemic assistance payments to dairy farmers who received lower value for their milk (primarily Class I suppliers) due to market abnormalities (widespread de-pooling) caused by the pandemic. More recently, however, the impacts of the formula change have been less noticeable. Between January 2021 and July 2022, the higher-of would have contributed an additional $5 million into the federal order pool compared to the average-of. While that’s not insignificant, it’s incomparable to the $744 million targeted by the PMVAP from 2020. Most recently, the Class III price has drifted apart from the Class IV price once again, which will result in pool losses once class utilization and pool volumes are updated for August and September. Figure 1 displays a comparison of Class I prices between the current formula and the higher-of option (if it was in place) from July 2018 to the present, all else held constant. To estimate the impact on dairy farmer revenue, the difference in the Class I milk price between the current system and higher-of was multiplied by the Class I pool volume across all FMMOs. These calculations are presented in Figure 2.
Conclusion
The 2018 farm bill reauthorized many programs important to dairy farmers’ ability to hedge against risk, address unexpected losses associated with contamination, fight food waste, and access technical and innovative business support. The establishment of and flexibilities provided in the DMC program have proved vital to producers during a period of excess market variability. While most provisions have been well received, others, like the change to Class I milk base price formula, have contributed to angst for some producers. As discussions ramp up for the 2023 farm bill, understanding the history of existing dairy programs and how they’ve performed under unprecedented volatility will allow for more informed recommendations.
