Dave Natzke

Editor / Progressive Dairy

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Hay price calculations

One provision affecting nearly all DMC participants is the change in the DMC feed cost formula to better reflect the actual cost dairy farmers pay for high-quality alfalfa hay.

In 2019, the USDA began using an alfalfa hay blend price in DMC feed cost calculations. On a 50-50 basis, the calculation used the monthly average U.S. price for all alfalfa hay in 27 major hay-producing states and a monthly average price for “premium dairy hay” (Premium/Supreme alfalfa hay) in the five largest milk-producing states: California, Idaho, New York, Texas and Wisconsin.

Under the new formula, the USDA uses the premium dairy-quality alfalfa hay price at 100%, instead of the 50%-50% blended price.

The USDA’s Farm Service Agency (FSA) is planning to have the retroactive DMC alfalfa hay price adjustment payments available for approval by county offices on Monday, Dec. 13, according to a USDA spokesperson. The payments will be distributed as lump sums for each year.

The agency is projecting about $29 million will be distributed to cover adjustments for 2020, with another $104 million to cover hay price adjustments through the first 10 months of 2021. Due to variations in coverage elections by individual producers, the USDA did not provide specific payment rates.

Hay adjustment background

DMC indemnity payments were triggered in five months in 2020: in March, April, May, September and December. Based on Progressive Dairy calculations, it doesn’t look like the hay cost adjustment will trigger new payments at the $9.50 coverage level for any of the other seven months in which there were no indemnity payments at any level. There will be minor adjustments triggering indemnity payments for producers at lower coverage levels. For example, the adjustment in 2020 will provide new indemnity payments for those covered at the $6 level in April and $9 level in March.

The difference in the DMC hay price and the premium dairy-quality hay price during the five affected months in 2020 averaged about $14.50 per ton. Multiplied by the DMC hay cost factor of 0.0137, that averages about 19.865 cents in the total DMC feed cost for those five months. Spread out over the full year, that averages about 8.25 cents per hundredweight (cwt) on milk enrolled in DMC.

DMC payments were already triggered in every month in 2021 (through October). The hay price adjustment will only trigger new payments for those covered at the $6 level in February 2021 and the $7 level in January 2021.

Across all months so far in 2021, the difference in the DMC hay price and the premium dairy-quality hay price is about $15.95 per ton. Multiplied by the 0.0137 DMC hay factor, that averages about 21.8515 cents in the monthly total feed cost, reducing the monthly margin by an equal amount.

Based on those estimates, the hay adjustment payments would be about $825 per million pounds of milk for 2020 and about $1,820 per million pounds of milk for the first 10 months of 2021. Remember, these are only “best guess” estimates, so confirm payment rates with FSA next week.

Also, 2021 DMC payments are subject to a 5.7% sequestration deduction.

Starting with the November 2021 DMC margin announcement scheduled for Dec. 31, the revised feed cost calculation will use only the price for premium dairy-quality alfalfa hay to determine the DMC margin and potential indemnity payments.

Supplemental DMC

The supplemental DMC provision allows small and midsized producers to use actual 2019 milk marketings – instead of the original baseline marketings in years 2011, 2012 and 2013 – enrolling supplemental pounds up to the cap of 5 million pounds.

The adjusted milk production baseline is effective retroactive to January 2021 and runs through the life of the current farm bill and DMC program, including 2022 and 2023 DMC coverage years.

Supplemental DMC will require a revision to a producer’s 2021 DMC contract and must occur before enrollment in DMC for the 2022 program year (see below). Eligible producers will be required to provide FSA officials with their 2019 milk marketing statement.

DMC premiums are required on enrolled supplemental production at the standard premium rate, including those dairy operations with lock-in contracts who enrolled in DMC through 2023 and previously received a premium discount under a special sign-up provision. No discounted premiums are being allowed for supplemental pounds of coverage for lock-in contracts.

Not all of the increase in the production history will be eligible for a supplemental payment. The program limits that payment to cover 75% of the difference between an eligible dairy operation’s actual 2019 milk marketings and its previous DMC milk marketing history. No supplemental payments are permitted on milk production above 5 million pounds per year.

Since production history adjustments will vary from farm to farm, determining individual payment rates isn’t possible. According to the USDA spokesperson, the FSA is projecting $137 million for 2021 supplemental DMC payments, with the total subject to change as dairy operations establish supplemental production history during the enrollment period.

Once supplemental production history is established and the 2021 DMC contract is revised and approved, payments will be processed the next day, according to the USDA spokesperson.

As with the regular program, 2021 DMC supplemental payments are subject to a 5.7% sequestration deduction.

2022 enrollment

Finally, the sign-up period for the 2022 DMC program will run from Dec. 13, 2021, to Feb. 18, 2022, at USDA FSA offices. For DMC enrollment, producers must certify with the FSA that the operation is commercially marketing milk, sign all required forms and pay the $100 administrative fee. The fee is waived for farmers who are considered limited resource, beginning, socially disadvantaged or a military veteran.

Any payments DMC participants received for either the hay adjustment or supplemental production history cannot be applied to 2022 DMC premiums, according to the USDA spokesperson. However, for 2022 DMC, dairy operations with 100% share have the option to have 2022 premiums fees deducted from indemnity payments.

The current payment sequestration deduction rate of 5.7% continues into 2022.

To determine the appropriate level of DMC coverage for a specific dairy operation, producers can use the online dairy decision tool.

Due to concerns over COVID-19 variants and staffing, producers are urged to call their FSA offices to set up appointments.