EAST LANSING, Mich. — The deadline for this year’s signup for the Dairy Margin Protection Program is fast approaching. Dairy farmers have until Dec. 11, 2020 to sign up and have this pricing risk tool available for the 2021 season.
The Dairy Margin Coverage (DMC) program was created upon the signing of the 2018 Farm Bill. It replaces the former Margin Protection Program (MPP) and has several improvements to make it useful to almost all dairy farmers in Michigan. DMC is a voluntary program that makes payments when the national average income-over-feed-cost margin falls below a “farmer selected” coverage level. It is one of many risk management tools that farmers can use in a volatile market.
What features did the 2018 Farm Bill bring in?
The DMC program features lower premium cost for all milk covered in Tier 1 or under five million pounds. Five million pounds is equivalent to a farm of 200 milking cows producing 25,000 pounds of milk per cow/year. Currently, Michigan is ranked first in the nation in production per cow at 26,725 pounds per cow/year (2019).
Farms can cover anywhere from 5% to 95% of their production. For large farms, this means they can cover at least some of their milk production at Tier 1 prices. Farms can select a coverage margin level of up to $9.50 per hundred weight of milk (cwt.) for Tier 1 production. Coverage margin level choices remain at $4 to $8 for Tier 2 coverage.
A coverage margin level of $9.50 (Tier 1) has a premium cost of $.15 cwt/year on Tier 1 production (first five million pounds). Coverage premiums are significantly higher for Tier 2 production. Premiums range from $0.00 per cwt for $4 margin coverage to $1.8130 per hundred weight for $8 margin coverage. In the last two years, the DMC program has paid producers more than the cost of premiums, making this program worth looking at.
What does all this mean for Michigan dairy farms?
The DMC program allows them to cover a bigger margin between milk price and feed cost, for a cheaper rate when compared to the old MPP. This is especially important to Michigan dairy farmers, who have been impacted by the current low milk prices more than other dairy producing states. This is because of a current imbalance in production vs. processing capacity in Michigan. Dairy farmers here are often receiving over $1 less cwt. than other states. Causes for this disparity include the increased cost of hauling milk out of the state and having to sell the milk at a discount in order to find a processor for it. New processing capacity is coming on-line, but full processing capacity and the impacts on Michigan markets have yet to be fully realized.
There are two decisions that dairy farmers will need to make in this year’s sign up period: What margin to cover, and what percentage of their historical production level to cover.
To help make this decision Michigan State University Extension recommends the use of the DMC decision tool. It can be found at: https://www.fsa.usda.gov/programs-and-services/farm-bill/farm-safety-net/dairy-programs/mpp-decision-tool/index. This tool is user-friendly and can aid a dairy farmer in making decisions on how much to cover and at what level. It will forecast the probability of the coverage levels being triggered by the predicted future milk price.
In 2021, it currently predicts that the program will have pay outs below the $9.50 margin level from January 2021 to August 2021 and the pay outs are possible the rest of 2021 at the $9.50 coverage level. This tool also features a probability table. This table will list the current probability of payment at different levels of coverage until August of 2021. Under the select coverage section of this tool, the user can select for their annual historic production and coverage percentage. This will allow the user to see the price per cwt., the premium cost, the expected payment form the program, and the probability of that payment.
Dairy farmers may also want to view a webinar produced in 2019 by the MSU Extension, featuring Christopher Wolf, professor of agricultural, food and resource economics at Michigan State University, along with Roger Betz and Stan Moore of MSU Extension. The webinar can be accessed through the MSU Extension farm management team’s webpage, or by going to the web page address http://bit.ly/MSUEDMC.
Although the Dairy Margin Coverage program will not solve our current low-price crisis in dairy, it can provide meaningful help to our Michigan dairy farmers. Using the DMC program, along with other risk management tools, can help manage risk on the farm. Dairy farmers are encouraged to contact their local USDA Farm Service Agency office soon to begin the paperwork process.
— Stanley Moore and Marianne Buza, MSU Extension
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