Dairy Margin Coverage Sign-up Begins June 17

Dairy farmers can enroll in the new Dairy Margin Coverage (DMC) program at their local Farm Service Agency office beginning June 17. Enrollment ends September 30.

The DMC program, enacted with the 2018 farm bill, is being promoted as a better, more effective program for farmers—or at least those with fewer than 250 cows--to protect milk/feed margins. Through the first three months of 2019, DMC will pay out an average of $1.15/cwt for $9.50 coverage. The premium for that coverage for Tier 1 production (up to 5 million pounds annual) is 15¢/cwt.

Current futures markets (in early June) also predict payments at the $9.50 coverage level until July and perhaps into August. In any event, the 15¢/cwt premium for the entire year will already covered by January and February indemnity payments.

The DMC program offers a number of changes, most of which Congress is offering as enticements to farmers to sign-up for the program. Among them:

• Tier 1 coverage jumps to 5 million pounds of production, up from 5 million pounds.

• Coverage levels range from 5 to 95% of production history, up from 25% to 90%. (This means farms of up to 4,000 cows can get Tier 1 coverage on 5% of their production history.)

• Top margin coverage is $9.50, up from $8, for Tier 1 coverage. For Tier 2 coverage, the maximum margin remains at $8. 

• For Tier 2, if farmers select $8 margin coverage or less for their Tier 2 coverage, they must select that same coverage level for their Tier 2 production. If they select $8.50 or higher coverage for their Tier 1 production, they may select any level of coverage for Tier 2 production.

• Production histories are now locked in for the five years of the program and will not be adjusted upwards as national milk production increases.

• Farms which enroll for all five years receive a 25% reduction on premiums.

• Farms may have reimbursements coming from a portion of the premiums they paid under the old Margin Protection Program. Farms can either receive 50% of the reimbursement amount as cash or take 75% of the amount as a credit toward DMC premiums. 

• Farms can enroll in both the DMC and Livestock Gross Margin-Dairy (LGM-Dairy) insurance program and cover the same milk, they can enroll in both DMC and Dairy Revenue Protection (DRP) insurance and cover the same milk, or they can enroll in both LGM-Dairy and DRP, but not on the same milk.

•DMC payments may be reduced due a sequester order required by Congress. In 2019, that sequestration reduction will by 6.2%.

The Program on Dairy Markets and Policy, powered by dairy economists from Wisconsin, New York, California, Minnesota, Michigan and Ohio, has developed a dairy decision tool that allows farmers to estimate what their DMC premium payments would be at various coverage levels. It also provides the probability of payments being triggered based on current futures market prices. Mark Stephenson, the director of the Program and a dairy economist at the University of Wisconsin, has also produced a 26-minute video on how to use the decision tool.

In the past, Extension dairy economists have been reluctant to make recommendations to farmers about program participation. But the DMC is so farmer friendly, they are generally urging farmers to participate if they want risk protection and are uncomfortable with other tools such as futures contracts, options or forward contracts.

 “At $9.50, the DMC program not only pays more [than the old Margin Protection Program (MPP)], but it triggers much more often,” Stephenson says. “For instance, over the 2014 farm bill if DMC had been in place vs MPP: Payments at the $8.00 level of coverage would have triggered 19 months, or 32% of the time, for an average payout of 27¢. At $9.50, the DMC program would have triggered payments 39 of the months, or 65% of the time ,for an average payment of $1.  At 15¢, $9.50 coverage provides a lot of risk protection on the first 5 million pounds of milk.

“If you are buying $9.50 level coverage, it also means that larger farms with more than 5 million pounds of historic production can cover their Tier 2 milk at any level they choose.  So, I would choose 95% of my historic production and then make a decision on the Tier 2 level of coverage.  It is costless at $4.00 and you have maxed out your Tier 1 historic production.  But, it only costs 1/2¢ to buy up to $5.00 coverage which is much better catastrophic coverage than $4.00.  We don’t get to those [catastrophic] levels very often, but for a few hundred dollars, you have bought a significant improvement in catastrophic coverage.”

Stephenson is also recommending farmers sign-up for five years of coverage. “It will save you a few thousand dollars, and you don’t have to think about your choices for the next several years,” he says.

Table. Dairy Margin Coverage Premiums*

Coverage Level                                Tier 1                                                  Tier 2

                                             (5 million lb or less)                        (Above 5 million lb)

$4.00                                                  $0.00                                                  $0.00

$4.50                                                  $0.0025                                             $0.0025

$5.00                                                  $0.0050                                             $0.0050

$5.50                                                  $0.03                                                  $0.10

$6.00                                                  $0.05                                                  $0.31

$6.50                                                  $0.07                                                  $0.65

$7.00                                                  $0.08                                                  $1.107

$7.50                                                  $0.09                                                  $1.413

$8.00                                                  $0.10                                                  $1.813

$8.50                                                  $0.105                                                not available

$9.00                                                  $0.11                                                  not available

$9.50                                                  $0.15                                                  not available

*All participating farms must also pay a $100 annual administrative fee.