With the scheduled enrollment period for the 2021 Dairy Margin Coverage (DMC) program in its final days, dairy market analysts are sounding alarms for substantial milk price risk in the year ahead.
Natzke dave
Dave Natzke
Editor / Progressive Dairy

DMC sign-up activity at USDA’s Farm Service Agency (FSA) offices did pick up during the first week of December, when about 3,320 more producers were added nationwide. As of Dec. 7, 11,166 dairy operations (about 45% of those with established milk production history) had enrolled in the 2021 DMC program. Milk production enrolled for 2021 was estimated at 89.4 billion pounds, also about 45% of the established history.

Pending USDA action on request for a sign-up deadline extension, the current deadline to enroll for 2021 is Friday, Dec. 11.

Addressing a DMC media roundtable discussion late last week, USDA FSA Administrator Richard Fordyce said the agency did not anticipate extending the 2021 enrollment deadline.

However, in a letter to the USDA, Dec. 7, Jim Mulhern, president and CEO of the National Milk Producers Federation (NMPF), urged U.S. Ag Secretary Sonny Perdue to extend the sign-up period to Jan. 30, 2021. Mulhern said the extension would allow dairy farmers to make better-informed choices while giving both milk producers and USDA staff – strained by coronavirus-related challenges – additional time to communicate.

Advertisement

“Extending the DMC deadline to the end of next month will allow farmers to better focus on the turbulent marketing environment we now expect to see in 2021, once we are through the upcoming holiday season,” Mulhern said. He noted the USDA recently announced a similar one-month deadline extension to assist fisherman applying for its seafood trade relief program.

Mulhern also urged dairy farmers to sign up for the program, given the high likelihood that indemnity payments will far exceed premiums next year.

As a reminder, dairy producers who previously signed up for DMC through 2023 must still contact their local FSA office, pay the $100 annual administration fee and recertify they are commercially producing milk.

Margin pressures mounting

Joining Fordyce in the DMC media roundtable discussion, Marin Bozic, University of Minnesota dairy economist, pointed to several signs milk prices will be pressured lower in the first half of 2021, with longer-term risk extending later in the year. (A recording of the session is available here.)

One the demand side, those factors include:

  • Widespread COVID-19 vaccine distribution won’t likely ramp up until the middle of the year, extending social restrictions and the coronavirus’ impact on feed service sales.

  • Large government purchases of dairy products for distribution through the USDA Farmers to Families Food Box Program are likely to decline as that program is replaced by more traditional channels, including the Supplemental Nutrition Assistance Program (SNAP) and Women, Infants and Children (WIC) program.

On the supply side, factors negatively impacting the milk price outlook include:

  • Milk production continues to grow. Year-over-year production was up more than 2% in September and October, a troublesome growth rate for supply-demand balance. Dairy cow slaughter has been lower, a sign that producers may be hanging on to cows.

  • An indication of burdensome milk supplies is the price paid for spot loads of milk on the open market in the Midwest. Bozic said current prices, reported by the USDA’s Dairy Market News, are running an average of -$6 per hundredweight (cwt) below the current Class III milk price. A discount of -$2 is more typical for this time of year, Bozic said.

  • Adding further pressure to prices will be the large Glanbia-Dairy Farmers of America-Select cheese plant in St. John’s, Michigan, which will advance toward cheese-processing capacity in the second quarter of 2021. At capacity, it will process about 8 million pounds of milk per day, about 20% of Michigan’s milk supply, producing 800,000 pounds of cheddar cheese per day. Combined with increased processing capacity elsewhere in the Midwest, some analysts forecast overall U.S. year-over-year cheese production is expected to grow 5%-7% by next summer, far surpassing the typical domestic growth rate in cheese demand of 1%-2% per year. Bozic said he doesn’t believe current Class III milk futures prices have fully captured the impact of all that additional cheese.

“Unless we export almost all of that increased cheese production, we are going to have issues domestically with the amount of cheese,” Bozic said. “That’s going to bring protein prices down; that’s going to bring cheese prices down; that’s going to bring the Class III price down, and therefore, the U.S. all-milk price could be depressed as well,” Bozic said.

DMC payment triggers estimated

Based on feed and milk futures prices in early December, dairy producers enrolling in DMC at the Tier 1, $9.50-per-cwt coverage level would essentially set a 2021 Class III milk floor price of just under $18 per cwt, Bozic said. (At the close of trading on Dec. 4, 2020, CME Class III milk futures prices averaged $16.80 per cwt and under $16.50 per cwt during the first half of the year.)

As of Dec. 2, the DMC Decision Tool indicated indemnity payments for those producers would be triggered whenever the monthly average all-milk price fell below $19 per cwt. Based on current projections, that’s every month in 2021 except December.

“That’s an effective milk price floor for most producers,” Bozic said. “DMC should not be an afterthought; it should the cornerstone of their risk management strategy for 2021.”

And, recognizing that dairy markets can change quickly, Bozic warned that may be a “conservative” outlook.

“If any of those downside factors (listed above) materializes in full force, margins will go down and payments will go up,” he said.

Bozic said the low DMC enrollment rate as of early December was a concern and called on the USDA, dairy media, educators, processors, lenders and fellow dairy producers to spread the word before the 2021 enrollment deadline of Dec. 11, 2020. The lessons learned in 2020 showed producers who purchased DMC coverage at the maximum Tier 1 level (covering 5 million pounds of milk at a $9.50 per cwt margin) received over $30,000 in DMC payments.

He said a success rate for 2021 DMC enrollment would be about 60% of milk producers and milk production covered, which would be exceed 2020 enrollment by 5%-8%.

Sources and resources

With high levels of COVID-19 cases, the USDA is reminding dairy producers to check on their local FSA service center status before planning an in-person visit. The current operational status of every service center is available here.

All USDA service centers are staffed and open for business by phone, email and other digital tools.

The chorus of those urging dairy producers to enroll in DMC for 2021 has been getting louder as the deadline nears. Numerous webinars and podcasts are available for additional information.

  • The NMPF hosted a webinar, Dec. 2, to help dairy producers develop effective risk management plans for 2021. NMPF chief economist Peter Vitaliano provided a dairy price outlook for 2021 and reviewed the value of risk management tools, including the DMC program. Slides of the presentation are available here. A brochure providing an overview of the DMC program is available here. Access NMPF’s risk management webpage here.

  • Farm Credit East and Crop Growers LLP hosted a two-hour podcast featuring Bozic and Farm Credit East business consultant Gregg McConnell. They provided an overview of 2020-21 dairy markets and discussed risk management and market volatility. Find the recorded webinar here.

  • Cornell University’s Christopher Wolf and Jason Karszes authored an article, “Should I use risk management tools? Evaluate your financial risk,” in PRO-DAIRY’s November 2020 issue of The Manager.

  • The Ohio State University Extension and Ohio Dairy Producers Association has posted a three-part webinar on the basics of dairy risk management tools. Presentations cover the DMC program, Livestock Gross Margin-Dairy (LGM-Dairy) and futures and options, and the Dairy Revenue Protection program.

  • Zach Myers, Pennsylvania Center for Dairy Excellence risk education manager, hosted his monthly Protecting Your Profits call.

  • Michael Nepveux, economist with the American Farm Bureau Federation, said the low DMC enrollment through early December was somewhat perplexing to observers, given the potential of payments exceeding premiums seems relatively likely. Read: “As deadline approaches, DMC enrollments low, despite expected benefits.”  end mark
Dave Natzke