June has not been a good month for milk prices or dairy producer income margins. Hopefully you had the opportunity to protect some of yours or at least minimize some of the risk.
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 May 2023 DMC margin will be announced on June 30, with large indemnity payments expected again.
The April DMC margin was $5.84 per hundredweight (cwt), triggering Tier I indemnity payments at $6-$9.50 cwt coverage levels and Tier II indemnity payments at $6-$8 per cwt coverage levels.
Payments on April 2023 milk marketings enrolled in the program topped $134 million, bringing total payments for the first four months of 2023 to nearly $440 million. January-April DMC payments averaged $26,021 per dairy operation enrolled in 2023. All payments are subject to a 5.7% sequestration deduction.
Based on current futures prices and DMC decision tool calculations as of June 16, the forecast DMC margin for May falls to about $4.79 per cwt, $4.16 per cwt in June and $4.55 per cwt in July. Those are the lowest monthly margins in the program’s history.
Dairy margins started June weaker
Dairy margins slid further over the first half of June on a combination of lower milk prices and higher projected feed costs, according to Commodity & Ingredient Hedging LLC. A weakening export market is a contributor.
New crop insurance year begins
As noted last month, 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 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.
Dairy Revenue Protection
Dairy-RP quarterly endorsements are available for sale until about the 15th of the month preceding the quarter to be covered. The last day to purchase third-quarter (July-September) 2023 coverage was June 15. Producers managing risk through Dairy-RP are now eligible to cover revenue from the fourth quarter of 2023 (October-December) through the fourth quarter 2024.
Dairy-RP coverage cannot be purchased on days when major USDA dairy reports are released 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
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 July contains the months of September 2023 through July 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 May 2023 prices and pooling data. Uniform or blend prices were up in high Class utilization FMMOs but down elsewhere. With a wide Class III-IV price spread, Class IV milk pooling moved to a five-month low.
Read: May 2023 FMMO uniform prices mixed as Class III-IV pooling seesaws
May milk production
The USDA’s preliminary May 2023 Milk Production report was scheduled for release on Wednesday afternoon, June 21. Check the Progressive Dairy website for the numbers.
Milk dumping
With the school year ending and fluid milk orders down, milk supplies are running high, especially in the Midwest where the spring flush has been extended with cooler temperatures. Surplus milk was being discounted between $4 and $11 per cwt below the Class III price as cheesemakers remained at or near processing capacity. Milk handlers had trouble finding homes for extra loads, forcing some milk dumping.
Read: Production, processing capacity leading to milk dumping
Other news and resources
- Pennsylvania Center for Dairy Excellence (CDE) risk education manager Zach Myers presents a monthly recorded “Protecting Your Profits” webinar/podcast, generally the last week of each month. Myers reviews current milk market data and provides updates to guide decision-making and risk management strategies. Live interactive sessions are also held in January, April, July and October. The July 26 webinar will feature Hayley Springer, Penn State University Extension veterinarian and assistant clinical professor, discussing biosecurity.
- WASDE outlook. In a repeat of the previous month, the USDA’s monthly World Ag Supply and Demand Estimates (WASDE) report, released June 9, reduced the milk production estimate for 2023 but also lowered Class III and all-milk price forecasts for the year. Read: USDA cuts 2023 milk production forecast, Class III and all-milk price projections lowered
- LRP waiver. The USDA RMA published a bulletin suspending the 60-day ownership requirement for the Livestock Risk Protection (LRP) program. Under the LRP, producers must own their livestock within the last 60 days of their insurance coverage. According to the bulletin, the USDA will allow producers to apply to waive the 60-day requirement due to harsh drought conditions, which has caused feed shortages and prompted producers to sell their livestock sooner than normal. Producers will be able to apply for a waiver until Dec. 31, 2024.
