The Farm Service Agency reports more than 18,900 operations or 75 percent of all dairy farms with established production history are enrolled in the Dairy Margin Coverage program for the 2021 calendar year; enrollment closed Dec. 11, 2020. That’s a 50 percent increase from 2020 when about 50 percent of all dairy operations were enrolled. Part of the increase is due to the extreme price volatility experienced as a result of market fluctuations induced by the COVID-19 pandemic; that pushed many to enroll in an attempt to manage future risk exposure. Recent news of a seventh-consecutive month of payouts has many producers grateful for the enrollment decision.
The Dairy Margin Coverage program exists to provide a level of risk protection to dairy producers under reduced margin conditions when milk prices are reduced and or feed costs on average are inflated. The voluntary program provides payments when the calculated national margin falls to less than a producer’s selected coverage trigger. The margin is the difference between the average price of feedstuffs – the price of hay, corn and soybean meal – and the national all-milk price.
Producers are required to select a margin trigger rate and a percentage of production history to be covered – traditionally capped at 5 million pounds. Coverage is available for margins between $4 and $9.50 under a Tier I CAT or catastrophic level, or between $4 and $8 for a Tier II level in $0.50 increments. Producers who select coverage triggers at or more than the $4.50 level must pay per-hundredweight premiums ranging from $0.0025 to $1.813 per hundred pounds of milk enrolled, depending on the tier and trigger rate selected. All enrolled producers must also pay a $100 administration fee. Producers who only select the $4 coverage trigger do not pay premiums. Production-history selection ranges from 5 percent to 95 percent – in 5 percent increments – of a producer’s established production history.
Under the Agriculture Improvement Act of 2018, known as the 2018 farm bill, production history for each operation is established using the biggest number of the operation’s marketings from the 2011, 2012 or 2013 calendar years. Under that framework, production history for an operation would not change even if farm characteristics such as the size of the herd were altered. This past December the new Consolidated Appropriations Act of 2020 made supplemental Dairy Margin Coverage based on 75 percent of the difference between 2019 marketings and the old base calculation – 2011-2013 milk marketings. The new policy allows operations to option for greater milk-production coverage if changes to herd size were made since the 2011-2013 basis years. Though currently the law of the land, the U.S. Department of Agriculture has yet to release further guidance, or details on when or how the program change would be implemented. That leaves the 2018-farm-bill framework currently in effect.
June was the seventh-consecutive month with calculated margins at less than the $9.50-per-hundredweight trigger cutoff. At $6.24 per hundredweight, the June margin triggered payments under the Tier I level ranging from $0.26 per hundredweight at the $6.50 selection rate to $3.26 per hundredweight for those at the $9.50 selection rate. The $6.24 also triggered Tier II level payments ranging from $0.26 per hundredweight at the $6.50 selection rate to $1.76 per hundredweight for those with the $8 selection rate. The Farm Service Agency expects to pay out more than $540 million in Dairy Margin Coverage payments this year, with an average of $28,696 per operation.
One of the primary culprits for reduced overall margins is increased feed costs. The factored average feed cost used to calculate program margins reached $12.31 in May and $12.16 in June, the biggest levels since the program began in 2019. Figure 1 displays factored average feed cost used to calculate the margin for the past two years. Subtracting the factored average feed cost from the USDA-reported all-milk price gives the milk margin responsible for triggering payments for producers with relevant protection levels.
Most of the increasing trend in feed costs can be linked to corn and soybean-meal prices that have remained more than average since this past summer. Backed by strong exports and reduced supply expectations globally, increased feedstuff prices further pressure the solvency of livestock and dairy farms. Though not as severe of an increase, the blended alfalfa price has experienced a recent increase. That’s at least partially linked to severe drought conditions across western states that account for 57 percent of the nation’s hay production by value.
Dairy farmers have also outpaced milk-production expectations across the board. Milk production per cow increased 0.2 percent in the first quarter and 2.2 percent in the second quarter from 2020 levels, thanks to continued advancements in dairy-herd management.
• further adoption of more-efficient milking systems
• improved nutritional plans
• effective health and husbandry procedures
In its February outlook, the USDA forecasted a 1 percent increase in national milk production in the first quarter and a 3.59 percent increase for the second quarter. They were surpassed by actual increases of 1.07 percent and 3.69 percent, respectively. Record supply can be linked to a record national dairy herd at more than 9.5 million strong as of July 1. In addition new processing plants in the upper Midwest increased demand for milk, prompting several large-scale expansions in the region and helping drive the increase. Heavy supply conditions negatively pressure milk prices and margins, especially in regions with reduced regional consumption.
Record butterfat levels, reaching more than 4.05 percent for 2021 – an increase from 3.95 percent in 2020 – have contributed to historic overhanging butter stocks. In May ending commercial stocks outpaced domestic commercial disappearance by 234 million pounds. Further additions to stored butter product threaten Class IV prices with related futures prices on a decreasing trend.
Strong export conditions for U.S. dairy present a positive note for farmers struggling from domestic margin rates. In the latest export data, January-June 2021 showed the biggest levels of dairy-product exports by value in history, with $3.739 billion worth of product sold across borders. That’s compared to $3.308 billion in 2020 and $2.896 billion in 2019. It translated to $1.379 million metric tons of dairy product exported from U.S. borders, a 12 percent increase in volume from 2020.
• Mexico leads the pack with $844 million in dairy purchases – 285,000 metric tons. That’s a 19 percent increase in value purchased from 2020. Mexico’s primary purchases were non-fat dry milk at $453 million and cheese curds at $225 million.
• Canada follows with $408 million in dairy purchases – 97,000 metric tons. That’s a 12 percent increase in value from 2020. Canada’s primary purchases were “other dairy products” at $264 million.
• Quickly approaching in third place is China with $353 million in purchases – 236,000 metric tons. That’s a whopping 64 percent value increase from 2020. China’s primary purchase was whey at $145 million.
Export markets remain a viable outlet to move U.S. product and reduce harmful market effects of oversupply. Continued work with international markets to develop opportunities for U.S. dairy can reduce pressure on risk-management programs.
Risk-management programs like the Dairy Margin Coverage program provide a revenue buffer for producers feeling the tight squeeze of shrunken operational margins. Persistently increased feed prices, strong domestic supply and large product stocks will continue to pressure those margins from both the cost-of-production and market-price angles. Although exports offer an opportunity for supply relief, short-run market conditions have triggered program payments for producers at or more than the $6.50 margin rates for Tier I and II protections. Until feed costs recede or the all-milk price increases to a margin greater than $9.50, at least some producers will continue to receive program payouts.
Daniel Munch is an associate economist with the American Farm Bureau Federation’s Market Intel. Visit www.fb.org/market-intel for more information.