Dairy Margin Coverage Program to Offset 2021 COVID-19 Risk
Enrollment for the Dairy Margin Coverage (DMC) program closes Friday, December 11, 2020. To date, just 4,500 dairy producers have enrolled in the safety net program. In 2020, more than 37,000 dairy producers received almost $200 million dollars in payments. Marin Bozic, an assistant economics professor at University of Minnesota, says producers would be wise to use the DMC to offset potential COVID-19 risk in 2021.
“While there has been positive news about COVID-19 vaccine development, we do not expect out-of-home food consumption to return to normal until at least summer 2021,” he said in an FSA Q&A. “In contrast, milk supply is growing strongly, and new cheese processing capacity is in the process of being commissioned in Michigan and some other states.”
All of the leading dairy analysts are worried about the first half of 2021. Additionally, the global macroeconomic outlook is not very optimistic at this point because of COVID-19 effects, Bozic says.
“Of course, everyone hopes for the best, but we do not use risk management for the best-case scenario, but to shield us from an adverse drop in prices. DMC offers excellent value-for-money to dairy producers, and if the 2021 feed costs materialize at the level where they are projected to be, then $9.50 coverage would trigger payments when the U.S. all-milk price falls below $17.50 to $18.25 per hundredweight,” he says. “Historically, the Class III milk price was about $1.40 below the U.S. all-milk price, so $9.50 coverage would correspond to an approximate Class III milk price floor of $16.10 to $16.85.”
According to Bozic, the DMC is a “significant upgrade” over previous dairy programs in the Farm Bill.
“My research suggests that the program has the potential to deliver effective risk protection for dairies with herd sizes up to 250 cows, and partial risk protection for larger dairies,” he says. “In addition to researching this topic, I have worked with Dr. Mark Stephenson to redesign the DMC dairy decision tool to focus it on program aspects that are most critical for making informed sign-up decisions.”
Over the last fifteen years, payments would have exceeded premiums in all years other than 2014, which most producers will remember as a year with exceptionally strong milk prices, Bozic says.
“The program is cash-flow friendly,” he adds. “Payments are frequent during spring months, when margins are typically lower, but the program premiums are not due until September.”
