January 15, 2019
Dairy Margin Coverage Through Farm Service Agency (FSA)
Over the course of the last few months and years, numerous programs have been released to help dairymen manage milk price. Futures & options on futures contracts have been a staple for many years allowing producers to book/protect milk price through the plant or individual hedge account. Livestock Gross Margin (LGM - Dairy) and the Margin Protection Program (MPP) were others. One of the more recent programs to be released is Dairy Revenue Protection (DRP) for which we covered in a previous newsletter. In this edition, I would like to take a closer look at Dairy Margin Coverage (DMC).
DMC, better known as the revamped MPP program for 2019, is a voluntary program for producers to sign up through their local Farm Service Agency (FSA). DMC continues as an income-over-feed cost program where payments are triggered monthly whenever margins fall beneath elected coverage levels. Several challenges exist when considering the formula used to calculate the income-over-feed cost margin as shown in the image below.
Despite the imperfect calculation of the National Milk Margin and what you actually experience on farm, many positive changes have been made to DMC. Prior to 2018, one of the biggest criticisms of the old MPP was that margins weren't offering enough coverage for the premium required. The 2018 MPP version addressed this issue as it reduced premiums. The $8 margin was reduced from 47.5 cents in 2017 to 14.2 cents on the first 5 million pounds. DMC takes coverage to a whole new level by adding 3 separate coverage levels. See below. On the first 5 million pounds, $9.50 represents the maximum coverage that one can protect at a cost of 15 cents/cwt. A one-time election to sign up for DMC for the entirety of the farm bill is also offered. This allows producers to reduce their premium costs by 25%. Your 15 cent cost at the $9.50 level would become 11.25 cents/cwt.
Another beneficial change to the DMC program is the amount of milk that a producer can cover. The original MPP program had volume requirements of 25-90% while DMC allows 5-95% of milk production to be covered. This allows smaller operations the opportunity to protect greater amounts of their milk then before. It also allows larger operations to participate in a more affordable way by covering a smaller portion of their milk. A dairy that produces 100 million pounds/year can now cover 5 million pounds without incurring higher premium costs in the 2nd Tier like before.
Many tools exist to assist dairymen in managing milk price and DMC is one to explore. While not the silver bullet of risk management, DMC can be used in conjunction with other marketing tools, such as DRP and futures/options, to construct a diversified risk management portfolio. Our analysis of the DMC product concludes that up to 5 million pounds/year should be considered for DMC. Operations producing more than 5 million/year should look at other marketing tools on those pounds. For more information on DMC, I encourage you to visit the following link: https://www.fb.org/market-intel/reviewing-dairy-margin-coverage
As always, we welcome any questions that you may have. Give us a call to sort through DMC and all other marketing tools.