As with most government programs, dairy farmers can tie themselves in knots trying to figure out the best coverage levels.
With the new Dairy Margin Coverage (DMC) program, that best option is simply to keep it simple, says Marin Bozic, a dairy economist with the University of Minnesota and associate director of the Midwest Dairy Food Research Center. He spoke this afternoon on a webinar hosted by I-29 Moo University.
“If I were a dairy producer, I would go with $9.50 DMC coverage, and I would not think twice and commit for all five years,” he says.
For larger dairy farmers with more than 5 million pounds of production history, he also says simplicity is best. Ensure the first 5 million pounds of production history for Tier 1 at $9.50, and ensure the Tier 2 production above $5 million at $4, he says.
Ensuring all five years also allows you to use the 75% net premium refund from previous Margin Protection Program enrollment toward your new DnC premiums that Congress is allowing with the new farm bill. The premium refund refers to the MPP margins paid less benefits received from 2014 through 2017. You can also claim a cash refund, but the refund is only 50% of the net premium. (Note: The $100 administrative fee is not subject to refund because it was a fee paid to cover the administrative costs of the program.)
Some farmers are asking what kind of milk price floor the DMC program creates. Based on futures prices for feed in the feed formula, Bozic and other economists estimate feed costs will range from $8.45 to $8.68 in 2019, or an average of about $8.55. If you add the $9.50 coverage level to that, it means the DMC is covering a milk price of $18.05. Less the 15¢/cwt DMC premium, the U.S. All-Milk floor price would be $17.90.
Bozic believes the DMC program provides excellent risk management for producers with a production history of 5 million pounds of milk or less. If the program had been in place over the past four years, it would have provided net premiums as follows:
2015: Eight months of at least a $1 net payout.
2016: Two months with more than a $3.50 payout, five months with more than $1.50 net payout.
2017: Four months of some payout, with all the payouts exceeding the premiums.
2018: Through October, net payouts just shy of $2 each month.
USDA’s Farm Service Agency must first complete rule writing for the DMC program before sign-up can begin. The sign-up period is expected to open in late February and then continue for 90 days. Coverage will be retroactive to January 1, 2019.