With the calendar turning to December, a couple of dairy risk management deadlines are approaching quickly.
First, the deadline to enroll in the 2023 Dairy Margin Coverage (DMC) program and make a coverage election is Dec. 9, at USDA Farm Service Agency (FSA) offices.
Second, the sales period for first-quarter 2023 coverage under the Dairy Revenue Protection (Dairy-RP) program closes on Dec. 15.
In recent weeks, near-term dairy markets have fluctuated. Dairy margins declined over the second half of October, as milk prices weakened and feed input costs were steady, according to Commodity & Ingredient Hedging LLC. Those trends shifted over the first half of November, however, on a recovery in milk prices while feed input costs moved lower.
“There has been a mix of stabilization and volatility when you compare Class III and Class IV milk futures prices, while U.S. exports have been maintaining their record pace,” added Zach Myers, risk education manager with the Pennsylvania Center for Dairy Excellence (CDE).
Dairy Margin Coverage program
Looking at the DMC deadline, dairy operations that previously elected lock-in coverage during a previous registration and coverage election period must complete a CCC-801 form before the end of the 2023 sign-up period to certify that they are still in the business of producing and commercially marketing milk.
For dairy operations that established supplemental production history in 2022 and enrolled that production, no additional action is needed as that supplemental production history will be included on the 2023 DMC contract. Eligible dairy operations requesting the establishment of supplemental production history will complete a CCC-800A.
To assist in DMC sign-up participation, USDA’s FSA office is sending a reminder postcard to all DMC-participating dairy operations with production history not yet enrolled.
The October DMC margin and potential indemnity payments will be announced Nov. 30.
DMC program indemnity payments on August and September 2022 milk marketings were estimated at about $84.6 million.
The August DMC margin was $8.08 per hundredweight (cwt), triggering indemnity payments at $9.50, $9 and $8.50 per cwt coverage levels. The September DMC margin was $8.62 per cwt, triggering indemnity payments for Tier I producers covered at the $9 and $9.50 per cwt levels.
Myers, who hosts a monthly risk management webinar (see below), said DMC participation at the Tier I $9.50 coverage level has returned a net benefit annually since 2019.
“Projections for 2023 continue to show tight margins with the likelihood of indemnities triggered most or all of next year,” he said.
Dairy Revenue Protection
Dairy producers managing risk through the Dairy Revenue Protection (Dairy-RP) program are currently eligible to cover revenue through four quarters of 2023 and the first quarter of 2024. After the Dec. 15 deadline, sales shift from second-quarter 2023 through second-quarter 2024.
Dairy-RP coverage cannot be purchased on days when major USDA dairy reports that could impact markets, including Milk Production, Cold Storage and Dairy Product reports (see Calendar). Dairy-RP is also not available on days when applicable futures contracts move limit-up or limit-down or on days when Chicago Mercantile Exchange (CME) trading is closed due to holidays.
The market changes daily and Dairy-RP endorsements must be purchased between the CME market closing and the next CME opening.
Livestock Gross Margin for Dairy
Livestock Gross Margin (LGM-Dairy) is another subsidized margin insurance program administered by the USDA’s Risk Management Agency.
LGM-Dairy provides protection when feed costs rise or milk prices drop and can be tailored to any size farm. LGM-Dairy uses futures prices for corn, soybean meal and milk to determine the expected gross margin and the actual gross margin. LGM‑Dairy is similar to buying both a call option to limit higher feed costs and a put option to set a floor on milk prices.
Coverage can be purchased on expected milk marketings over a rolling 11-month insurance period. For example, the insurance period during the final week of January contains the months of February through December. Coverage begins the second month of the insurance period, so the coverage period for this example is March through December.
Sales periods for the LGM-Dairy program are open on a weekly basis. Unlike Dairy-RP, LGM-Dairy is available even if a sales period falls on the day of a USDA report. Premium payments are due at the end of the insurance period.
Other resources
- Myers will host a “Protecting Your Profits” webinar, Nov. 23, 12-1 p.m. (Eastern time). He’ll highlight the latest Class III and IV futures milk price forecasts and share updates on DMC margins and the Dairy-RP program. Each webinar is available via podcast or phone and is archived for viewing later. To participate, click here or phone: (646) 558-8656. When prompted, enter meeting ID 848 3416 1708 and passcode 474057.
- The USDA released its preliminary October milk production estimate on Nov. 21. October 2022 U.S. milk production was up about 1.2% from a year ago, with continued slow growth in cow numbers and a small increase in milk output per cow contributing to higher overall production. (Read Progressive Dairy's summary here.)
- In the USDA’s latest World Ag Supply and Demand Estimates report, the all-milk price forecasts for 2022 and 2023 were lowered due to downward trends in dairy product prices and larger expected milk supplies in 2022. (Read Progressive Dairy's summary here.)
The all-milk price forecast for 2022 is $25.50 per cwt, 10 cents lower than last month’s forecast. The all-milk price forecast for 2023 is $22.60 per cwt, 30 cents lower than the October forecast.
The milk production forecast for 2022 was raised, but the 2023 forecast was unchanged as lower expected milk cow numbers offset higher yield per cow. Milk cow numbers for 2022 are projected to average 9.405 million head, with average milk output per cow projected at 24,130 pounds per head. Looking ahead to 2023, milk cow numbers are forecast to average 9.415 million head, with milk per cow projected at 24,350 pounds.
