Dave Natzke

Editor / Progressive Dairy

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Minnesota Milk Producers Association (MMPA) Executive Director Lucas Sjostrom hosted Marin Bozic, University of Minnesota dairy economist, for a webinar to provide some initial analysis. The recording of the webinar, held on Dec. 29, is available here.

DMC milk production history adjustment

The bill creates a provision for Dairy Margin Coverage (DMC) program supplemental payments for small and medium-sized dairies in any month when DMC indemnity payments are triggered. The payments would cover 75% of the difference between the production history established in 2011-13 and 2019 actual milk production. (Read: COVID-19 relief bill includes DMC milk production history adjustment.)

The bill, signed into law on Dec. 27, requires the USDA’s Farm Service Agency (FSA) to create a sign-up period within 45 days for eligible producers to make production history adjustments. Any DMC supplemental payments will begin during the 2021 program year and are not retroactive to 2019 or 2020.

The January 2021 DMC margin won’t be announced until Feb. 26. The November 2020 DMC margin was announced Dec. 30 (Read: November DMC margin is $11.87 per cwt.), with the December 2020 DMC margin to be announced on Jan. 29.

One thing that adds some uncertainty to the process timeline is the change in political leadership, Sjostrom noted. Government agency leaders are political appointees, and the transition from the Trump to the Biden administration could require new administrators in key USDA positions.

With DMC Tier I production limits remaining at 5 million pounds of milk or less annually, the adjustment primarily benefits smaller operations by allowing them to increase annual milk production eligible for DMC coverage and indemnity payments up to that cap. No supplemental payments are permitted on milk production above 5 million pounds per year. The adjusted milk production baseline is effective from January 2021 through the life of the current farm bill and DMC program, ending in 2023.

Those eligible to make production history adjustments must already be enrolled in DMC for 2021; the bill specifically prohibits reopening of the 2021 enrollment period. Coverage levels (percentage of milk production covered and margin covered) on the additional milk must be equal to the coverage selected previously for 2021 (and beyond) on the original production history.

Any increase in milk production history also means the producer will have to pay the additional margin insurance premiums on that milk. All 2021 DMC indemnity payments are subject to a 5.7% sequestration deduction, down from 5.9% in 2020 and 6.2% in 2019.

Dairy Donation Program

The COVID-19 stimulus bill includes two donation-style programs; one is specific to dairy.

The $400 million Dairy Donation Program is designed to provide dairy products to food-insecure households while adding support to dairy prices by removing excess products from the market. Patterned after the Milk Donation Reimbursement Program created in the 2018 Farm Bill, this provision creates a mechanism for eligible dairy processors to partner with nonprofit organizations to distribute food to low-income individuals. Those partnerships may apply for and receive reimbursements to cover milk-related expenses for the dairy product donations. Retroactive reimbursement may be eligible for donations made in 2020.

American Farm Bureau Federation economists John Newton, Michael Nepveux and Shelby Myers estimated specific outlays for the DMC supplemental payments and dairy donation provisions add up to about $873 million.

Food box distribution

The COVID-19 relief package also designated an additional $1.5 billion to purchase agricultural commodities for nationwide distribution through the Farmers to Families Food Box Program.

In the fifth round of the program announced Jan. 4, 2021, the USDA issued a call for contractors to provide fresh produce, dairy products, fluid milk and meat products, including seafood. Contract awards are expected to be made by Jan. 19, with food deliveries beginning shortly after awards are issued and continue through the end of April.

Through Jan. 4, 2021, the USDA had distributed more than 132 million food boxes since the program was launched last April. Previous food boxes contained as much as 5-6 pounds of dairy products, plus a gallon of milk.

Cheese was especially popular under previous rounds of the Farmers to Families Food Box program – with a huge impact on Federal Milk Marketing Order (FMMO) milk class pricing volatility. The bill calls on the USDA to make purchases facilitating orderly milk marketing that maintains traditional price relationships between classes of milk. That could put added focus on butter and fluid milk.

While not specific on volumes, the USDA announcement for the latest round emphasized that other hard, semifirm or semisoft cheeses were acceptable in addition to cheddar and other cheeses. Class III milk futures prices opened sharply higher the day after the announcement.

Separately, the USDA opened bidding periods on two separate “Section 32” solicitations for fluid milk for federal food and nutrition assistance programs. Combined, the two solicitations total nearly 3.35 million gallons of 1%, 2% and whole milk in half-gallon and gallon containers. Bids must be submitted by Jan. 15, with contracts to be awarded on Jan. 25. Delivery is scheduled to multiple locations between Feb. 22-March 31, 2021.

Market impacts

While the Farmers to Families Food Box program and other dairy purchases are expected to support milk prices early in the year, Bozic doesn’t expect the DMC changes and other provisions in the stimulus bill to have a large, longer-term effect on dairy markets. Producers should not rely on continued direct government support and large-scale food box purchases, he warned.

“At some point that music stops, and there will not be enough chairs,” he said.

Production growth too strong

Factors such as 2020 Coronavirus Food Assistance Program (CFAP) payments and 2020 DMC indemnity payments will have a carryover effect on milk production. Although numbers are not in, government programs and financial support likely slowed the exodus of dairy farms in 2020, he explained. And at its current pace, 2021 U.S. milk production has the potential to grow as much as 3%.

“We are creating the conditions today for lower milk prices in the second half of 2021 and into 2022,” Bozic said. “That's why it's time to actually protect yourself in those quarters.”

While not strong, Class III milk futures prices into the second half of 2021 and into 2022 are “reasonable,” Bozic said. He urged producers to look at risk management tools – including Dairy Revenue Protection (Dairy-RP) and Livestock Gross Margin for Dairy (LGM-Dairy) – to lock in some protection.

Due to uncertainty over government intervention in the first half of 2021, the risk management premium costs for longer-term months are actually less expensive than near-term months, he noted. “Now is the time to look into more distant hedging for the rest of 2021 and potentially into 2022.”

With strong growth in milk production and increased cheese processing capacity, the U.S. faces a potential large-scale buildup of cheese inventories in 2021, perhaps on the scale of 7% year-over-year growth by the middle of the year, Bozic warned.

Although the Dairy Donation Program won’t be as attractive to processors as the food box purchases, which paid market prices for cheese, the donation program may help processors with overhanging inventories by reimbursing them for some of the milk and processing costs of the donated products. That may help restrict any milk dumping if there is processing capacity and a donation home for the product.

According to Bozic, milk production growth is less robust among other major dairy exporting countries, potentially leaving the door open for U.S. products on global markets.

“That gives me some hope that we can export part of our coming oversupply,” he said.

Separately, the COVID-19 stimulus package designates funding for direct payments, purchases, and loans to farmers and ranchers who have suffered losses due to the pandemic. With broad discretion provided to the USDA, it’s still unclear how stimulus bill direct payments and future food purchase funding will be distributed. Bozic anticipates time will be spent to evaluate the efficiency and effectiveness of 2020 federal assistance before 2021 funds are spent.