Dairy producers participating in the 2021 Dairy Margin Coverage (DMC) program will see even higher indemnity payments for February milk marketings.
The USDA released its latest Ag Prices report on March 31, including factors used to determine monthly DMC margins and payments. Based on preliminary calculations by Progressive Dairy, the February DMC milk income over feed cost margin is just $6.22 per hundredweight (cwt), the slimmest margin since April-May 2020, when the onset of the COVID-19 pandemic sent milk prices plummeting.
The small February margin triggers indemnity payments on Tier I and Tier II milk insured at all levels above $6 per cwt. Those with Tier I (5 million pounds or less of covered production history) who are insured at the top level of $9.50 per cwt will see a payment of $3.28 per cwt, following a payment of $2.36 per cwt on January milk marketings (Table 1).
Those insured at lower margins will also see strong indemnity payments. The payments are on one-twelfth of a dairy operation’s covered annual production history, and DMC payments are subject to a 5.7% sequestration deduction in 2021.
Milk price hits 24-month low
While slim margins last April-May 2020 were mostly attributed to low milk prices, February’s shrinking margin is due to declining milk prices and another increase in monthly average feed costs.
The February 2021 announced U.S. average milk price fell 40 cents from January to $17.10 per cwt, a 24-month low. It was $1.80 less than February 2020.
Among major dairy states, February milk prices took the biggest hits in Kansas, New Mexico and Texas, each down at least $1 per cwt from January. A handful of states (Florida, Georgia, New York, Ohio, Pennsylvania, Vermont and Virginia) saw gains of 30 cents or less (Table 2).
The lowest announced price in February was in New Mexico ($14 per cwt); the high was in Florida ($20 per cwt). Compared to a year earlier, February 2021 average milk prices were down $3 or more in Kansas, New Mexico and Texas.
Not included in the all-milk price calculations is the impact of negative producer price differentials (PPDs) on producer milk checks in February. February PPDs were negative in six of seven applicable Federal Milk Marketing Orders (FMMOs).
PPDs have zone differentials, so they’ll vary slightly within each FMMO. In addition, PPD impacts on individual milk checks are based on individual milk handlers.
Feed prices higher
On the cost side of the ledger, U.S. average feed costs to produce milk in February continued to rise to seven-year highs.
- The average price for a blend of premium and all alfalfa hay used in DMC calculations was $193 per ton, up $4.50 per ton from January and the highest since May 2020.
- Compared to a month earlier, the average price for corn jumped more than 50 cents to $4.75 per bushel, the highest in the history of DMC and its predecessor, the old Margin Protection Program for Dairy (MPP-Dairy).
- The rise in the average soybean meal cost finally stalled. At $427.28 per ton, the February average was down almost $12 from January, but still the second-highest monthly average since December 2014.
Those feedstuff prices yielded an average DMC total feed cost of $10.88 per cwt of milk sold (Table 3), up 52 cents from January and the highest since June 2014 under MPP-Dairy.
Indemnity payments expected through 2021
Based on current market conditions, DMC could pay monthly indemnity payments throughout 2021. Using the DMC Decision Tool, monthly average feed costs are expected to remain well above $10 per cwt of milk sold, topping $11 per cwt in May-July 2021. As a result, those insured at the $9.50 per cwt level would see a payment anytime the monthly all-milk price falls below $20 per cwt.
The March 2021 margin and any indemnity payments will be announced April 30. We already know the March 2021 Class I price is down 34 cents from February at $15.20 per cwt. Also on March 31, the USDA announced the March Class III price of $16.15 per cwt, up 40 cents from February, and a Class IV price of $14.18 per cwt, up 99 cents.
Production history adjustments still pending
There’s still been no word from the USDA regarding when adjustments to annual milk production histories for smaller producers will be applied. Approved in last December’s COVID-19 relief bill, the provision allows smaller dairy producers to update their milk production history baselines and receive a supplemental DMC payment on a portion of any increased milk production.
The adjusted milk production baseline, capped at 5 million pounds per year, is effective January 2021 through the life of the current farm bill and DMC program, ending in 2023.
Not all of the increase in the production history will be eligible for a supplemental payment. The bill limits that payment to cover 75% of the difference between an eligible dairy operation’s actual 2019 milk production and its previous DMC milk production history.
Once the USDA Farm Service Agency (FSA) determines a sign-up period, eligible producers must contact their FSA office with 2019 actual milk production records if they wish to adjust production history on an existing operation. Those eligible to cover additional milk under the DMC production history adjustment must already be enrolled in DMC for 2021.
Any increase in milk production history covered under DMC also means the producer will have to pay the additional margin insurance premiums on that milk.
