Short-term Class III milk futures prices and milk income margins are headed lower, with some improvement forecast for later in 2023. There’s room for changes in corn and soybean meal prices, with variability anticipated.

Natzke dave
Editor / Progressive Dairy

Here’s a monthly update on risk management tools available through the USDA and/or USDA’s Risk Management Agency (RMA), as well as other information impacting your milk check.

Dairy Margin Coverage (DMC) program

The April 2023 DMC margin will be announced on May 31, with large indemnity payments expected again. 

The March DMC margin was $6.08 hundredweight (cwt), triggering Tier I indemnity payments at $6.50-$9.50 cwt coverage levels and Tier II indemnity payments at $6.50-$8 per cwt coverage levels. Payments on March 2023 milk marketings enrolled in the program topped $126 million, bringing total payments for the first three months of 2023 to more than $305 million.

January-March DMC payments averaged $18,106 per dairy operation enrolled in 2023. All payments are subject to a 5.7% sequestration deduction.

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Based on current futures prices and DMC decision tool calculations as of May 16, the forecast DMC margins for April rise to about $6.60 per cwt, falling to $5.31 per cwt in May and $5.36 per cwt in June. 

New crop insurance year begins July 1

June 30 signals the end of one federal crop insurance year and the beginning of another. Under USDA rules, producers can cancel a policy, including Dairy Revenue Protection (Dairy-RP) and Livestock Gross Margin for Dairy (LGM-Dairy), with one provider and submit an application with another insurance provider, effective with the new insurance year. Cancellation during a crop year to submit an application for another policy provider is not allowed.

With the new crop insurance year set to begin on July 1, the RMA has also updated various insurance policy handbooks. While most updates pertain to administrative procedures and processing, RMA increased the requirement for actual marketings under LGM-Dairy from 75% to 85% of cumulative target marketings, matching the Dairy-RP program requirement.

Dairy-RP

Dairy-RP quarterly endorsements are available for sale until about the 15th of the month preceding the quarter to be covered. So the last day to purchase third-quarter (July-September) 2023 coverage is June 15. Until that date, producers managing risk through Dairy-RP are eligible to cover revenue from the third quarter of 2023 through the third quarter 2024.

Dairy-RP coverage cannot be purchased on days when major USDA dairy reports that could impact markets are released, 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.

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The market changes daily, and Dairy-RP endorsements must be purchased between the CME market closing and the next CME opening.

LGM-Dairy

LGM-Dairy is another subsidized margin insurance program administered by the USDA’s RMA.

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 coverage period available during the final week of May contains the months of July 2023 through May 2024.

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.

FMMO data

Administrators of the 11 Federal Milk Marketing Orders (FMMOs) reported April 2023 prices and pooling data. Uniform or blend prices were mixed in a narrow range compared to March, and producer price differentials (PPDs) were lower, in some zones turning negative. With price incentives, Class III milk depooling picked up. 

Read: April 2023 FMMO uniform prices mostly lower

April milk production up slightly

U.S. milk production continued a pattern of slow growth in April, with a Texas dairy fire impacting cow numbers, according to the USDA’s monthly Milk Production report. Read: Texas dairy fire impacts April milk production report

WASDE outlook

The USDA’s monthly World Ag Supply and Demand Estimates (WASDE) report was released May 12. Compared to last month, the USDA reduced the U.S. 2023 milk production estimate slightly but also cut Class III and all-milk price forecasts. Lower corn and soybean meal prices are ahead, but on-farm hay inventories are down. The 2023 average all-milk price is forecast at $20.50 per cwt; the 2024 average price is projected at $19.90 per cwt.

Read: USDA reduces 2023 milk production outlook, Class III and all-milk prices projected lower

Dairy margins start May weaker

Dairy margins deteriorated over the first half of May, particularly in nearby periods, as a sharp decline in milk prices more than offset steady to weaker projected feed costs, according to Commodity & Ingredient Hedging LLC. 

Another problem for dairy producers is that ongoing issues with labor, freight and maintenance are reducing the capacity of dairy processors. Cooperatives and milk handlers have been forced to either dump or sell spot milk at deep discounts, with producers receiving pricing of $4 to $12 per cwt below class for milk exceeding contracted volumes.

Tri-state dairy outlook seminar planned

A “Dairy and Ag Outlook Seminar: Understanding a Changing Industry,” will be held on June 14, 9:30 a.m. to 3:15 p.m., at Ridgeway, Iowa. Sponsored by Iowa State University Extension and Outreach, the University of Minnesota Extension and the University of Wisconsin Extension, the seminar is targeted toward assisting ag lenders and farm financial advisers in helping farmers manage risk and understand market outlooks.

The cost is $40 for agricultural lenders and service providers and $20 for dairy and ag producers and students. Payment will be taken at the door, but pre-registration is required.

Forage insurance update

Finally, for some forage producers and dairy producers who grow their own forages, the USDA is modifying the Annual Forage Insurance Program for the 2024 crop year. The change allows producers to choose the areas which they insure, rather than being required to insure all eligible acres.

The program is a rainfall index area-based plan that provides coverage to acreage planted each year and used as feed and fodder by livestock. The rainfall index does not directly measure an individual producer’s annual forage production or loss. Rather, it measures the normal precipitation deviation that occurs in and around the insured area, which is correlated with forage production.

The Annual Forage Insurance Program includes all counties in Colorado, Kansas, Nebraska, New Mexico, North Dakota, Oklahoma, South Dakota and Texas.

For details and a list of other modifications, read: USDA announces modifications to the annual forage and rainfall index program

Check the Progressive Dairy website for updates affecting milk prices as they become available.