Dave Natzke

Editor / Progressive Dairy

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Indemnity payments for those producers insured at the top margin will top $3.80 per hundredweight (cwt) (Table 1).

The USDA released its latest Ag Prices report on Aug. 31, including factors used to calculate monthly DMC margins and payments. The USDA’s Farm Service Agency (FSA) put the July DMC milk income over feed cost margin at $5.68 per cwt, 56 cents less than June, the lowest since May 2020 and the sixth straight month in which the margin was below $7 per cwt.

The margin was lower only two other periods in the seven-year history of the DMC program or its predecessor, the Margin Protection Program for Dairy (MPP-Dairy). That occurred in April-May 2020, the peak of the COVID-19 milk market disruptions, and in May-June 2016.

The July 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.

Average milk price lowest since March

The July 2021 announced U.S. average milk price fell 50 cents from June to $17.90 per cwt. July milk prices were lower than the month before in all 24 major dairy states (Table 2). The biggest drops were in Indiana, Michigan and Ohio, each down $1 or more.

New Mexico had the lowest average milk price in July at $15.70 per cwt. Florida producers were the price leaders at $22.30 per cwt.

Compared to a year earlier, the U.S. average milk price was down $2.70 per per cwt, with prices down $5 or more in Iowa, Minnesota, Oregon and South Dakota.

Corn, hay prices rise again

Overall feed costs increased slightly in July, with increased prices for alfalfa hay and corn offsetting another dip in soybean meal prices.

• The average price for a blend of Premium and all alfalfa hay used in DMC calculations was $216.50 per ton, up $2 per ton from June and the highest dating back to June 2014 under MPP-Dairy.
  
  
• The average price for corn increased another 12 cents to $6.12 per bushel, the highest ever under DMC or MPP-Dairy.
  
  
• The U.S. average cost of soybean meal fell to $365.23 in July, the lowest since September 2020.

Those feedstuff prices yielded an average DMC total feed cost of $12.22 per cwt of milk sold (Table 3), up 6 cents from June but still the second highest in the seven-year history of DMC or MPP-Dairy.

Hay price adjustment coming

Not included in the July margin calculations is a change in the alfalfa hay price factor. On Aug. 19, the USDA announced it would adjust monthly average DMC hay prices to give greater recognition to dairy-quality Premium alfalfa fed by dairy producers. Details, however, were not unveiled as of Aug. 31.

Based on Progressive Dairy estimates, the monthly difference between dairy-quality hay and the blend price currently used in DMC feed cost calculations averaged about $15 per ton in 2020-21.

The full impact on DMC margins will depend on how the hay price calculation changes are implemented. The USDA currently multiplies the monthly average hay price by 0.0137 to determine the hay cost factor. A $15 per ton adjustment would add about 20.5 cents per cwt to monthly average total feed costs.

This feed cost change will be retroactive to January 2020 and is expected to provide additional retroactive payments of about $100 million for 2020 and 2021. Unlike the pandemic assistance, this change will also be part of DMC through the life of the program, set to expire with the current farm bill in 2023. Beyond 2021, the USDA estimates the change will add about $80 million per year in DMC indemnity payments.

Full details will be provided when regulations are published in the coming weeks. Dairy farmers should wait until these details are available to contact their local USDA Service Center for more information.

On Aug. 19, the USDA also announced payments to dairy farmers through the Pandemic Market Volatility Assistance Program (PMVAP) for dairy and development of a $580 million supplemental DMC program for small and medium farms. Progressive Dairy will provide further details as they become available.

Read: Dairy pandemic assistance: The devil is in the details.

Indemnity payment outlook

Without a major change in milk or feed markets, monthly DMC indemnity payments are expected to continue through the end of the year.

The August 2021 DMC margin and any indemnity payments will be announced on Sept. 30. Factoring into the milk price, the August Federal Milk Marketing Order (FMMO) Class I base price is down 52 cents per cwt from July at $16.90 per cwt. August Class III and Class IV milk prices were to be announced on Sept. 1, but current Chicago Mercantile Exchange (CME) futures prices at the close of trading on Aug. 31 indicate both will be lower than July.

Based on futures prices as of Aug. 30, the DMC Decision Tool indicated monthly average feed costs used in indemnity payment calculations are expected to be above $12 per cwt in August and then remain in a range of $11.75-$11.20 per cwt through the end of calendar 2021. Those costs are likely to move even higher when the USDA changes the alfalfa hay price calculation.

Year-to-date DMC payments

Through Aug. 30, DMC indemnity payments for the first six months of 2021 topped $669.7 million, representing indemnity payments on January-June milk marketings. State-by-state enrollment and payment information is available here.

May 2021 mailbox, all-milk price spread was $1.18 per cwt

Differences in two monthly milk prices announced by the USDA maintained more than a $1 per cwt spread in May. The monthly spread between the average “all-milk” and “mailbox” prices was about $1.18 per cwt, up a penny from April.

The difference in the all-milk price and the mailbox price represents an additional challenge: USDA risk management programs, including the DMC program, are based on the all-milk price. With the mailbox price below the all-milk price, producers are unable to protect against falling net prices impacted by such things as negative producer price differentials (PPDs).

Affecting the May mailbox price, PPDs were negative across all applicable FMMOs, averaging -$1.48 per cwt. Read: PPDs stay on (negative) trend.

With baseline PPDs turning positive in June, the difference between the two announced prices should narrow. Read: Back in the pool: Positive PPDs return with Class III milk (for now).

The USDA announcements of mailbox prices generally lag release of all-milk prices by a couple of months. Through the first five months of 2021, the USDA’s mailbox prices averaged about $1.22 per cwt less than average all-milk prices for the same months.

NMPF Dairy Market Report

The low milk prices and high feed costs are slowly bringing U.S. milk production back in line with demand, according to Peter Vitaliano, chief economist for the National Milk Producers Federation (NMPF). Daily average production was down almost 2% from the spring flush high in April, a larger-than-usual drop, he wrote in the August 2021 Dairy Market Report.

Futures markets have taken notice, ending the long slide in their collective estimate of calendar year 2021 average milk prices beginning in mid-May. Rising cheese prices have been a key driver of this recent recovery. Although milk production is being channeled disproportionately into American-type cheese, growth in commercial use of such cheese hit double-digit percentages during the second quarter, while use of other types of cheese grew by fully half this amount. Domestic use of milk in all products showed a 1% gain, while exports continued their march toward a new record as a percent of domestic milk solids production.