Dairy Margin Coverage Signup Deadline Rapidly Approaching

Introduction and Overview of DMC

With a looming enrollment deadline of Friday, Sept. 20, fewer producers than anticipated have opted to enroll in Dairy Margin Coverage, the 2018 farm bill’s improved replacement for the Margin Protection Program. USDA is working diligently to communicate the deadline and potential benefits of participating in the program to the approximately 50% of the nation’s dairy producers who have yet to sign up. Additionally, USDA has developed a decision aid tool to help producers understand the program and determine the best coverage options.

An improvement on MPP, DMC is a voluntary insurance-style program that makes payments when the national average income-over-feed-cost margin falls below a farmer-selected coverage level. Coverage is available from $4 per hundredweight to as high as $9.50 per hundredweight in Tier I, and up to $8 per hundredweight in Tier II. Dairy producers pay premiums for coverage, with premium rates rising in step with the level of protection. Program payments, which may be triggered monthly, are made if the DMC margin falls below the farmer’s elected coverage level. Program payments are based on the amount of milk covered in the program and may range from 5% to 95% of a farm’s milk production history in 5% increments. The program has two tiers; Tier I covers up to 5 million pounds and has more affordable premiums than Tier II, which covers any milk over the first 5 million pounds. A farmer can enroll milk in Tier II at a different coverage level than Tier I. When a farmer enrolls in DMC, he or she may receive a 25% premium discount for a one-time election –binding for five years – on both the coverage level and the amount of milk enrolled in the program.

AFBF’s Market Intel team has already conducted an in-depth review of DMC and an analysis of some of the preliminary projected payments.

DMC Enrollment Rates to Date

Between the opening of enrollment on June 17 through September 8, 19,132 dairy operations have signed up for DMC. This is equivalent to 51% of the 37,500 licensed dairy farms in the U.S, and 71% of the 26,800 dairy farms with established production history through USDA’s Farm Service Agency.

Sign up is not evenly distributed across all states in terms of either absolute numbers or percentage of operations. With over 5,200 operations participating, Wisconsin has the most dairy operations enrolled, followed by Minnesota, New York and Pennsylvania.

In terms of production history volume, a few other states rise to the top. California has the most milk enrolled, with over 25 million pounds, followed by Wisconsin (21M lbs.), New York (8.8M lbs.), Idaho (8.7M lbs.) and Texas (7.4M lbs.). California, Idaho and Texas tend to have larger operations, so it makes perfect sense they will have more milk but fewer operations enrolled.

In terms of percentage of farms, the higher percentages are concentrated in the Midwest and New England, with other pockets such as Texas through Colorado. Still, these numbers are somewhat lower than one would expect given the attractiveness of the program and the high probability of program indemnities, i.e. payments.

Projected Payments

For 2019, FSA expects to make more than $257 million in payments to currently enrolled operations, and that number will only go up as more operations enroll in the program. So far, nearly half of the producers enrolling in DMC are taking advantage of the 25% premium discount by locking in for five years of margin protection coverage. The income-over-feed-cost margin is what is compared to the farmer’s elected coverage level to determine whether or not payments under DMC are made. So far, FSA has announced seven months’ worth of income-over-feed-cost margins for 2019, as well as the corresponding feed ingredient and milk prices. As Figure 5 demonstrates, at the $9.50 coverage level, payments have been triggered in all seven months. At the $9.00 coverage level, payments have been triggered in five of the seven months, as two of the months’ margins were at or above $9.00 but below $9.50.

At this point, if a producer were to enroll and cover 5 million pounds of milk at $9.50 coverage, the 2019 payments would be well above the premium. For example, a producer enrolling 5 million pounds under Tier 1 at the $9.50 coverage level would pay a premium of $7,500, not including the 25% discount. Payments already triggered for the year would amount to $27,083, leaving $19,583 for the producer to recoup (less administrative fees). Essentially, if producers choose not to enroll at least their first 5 million pounds under DMC, they are forgoing income that could help their dairy farm operation.

As mentioned, with current enrollment levels, FSA is expecting to payments to total nearly $258 million for 2019. Figure 6 shows that most of the money will likely be concentrated in the Upper Midwest, as well as Ohio, Pennsylvania, New York and California. Wisconsin again leads the pack with approximately $62 million in payments expected.

Using total expected payments and total milk enrolled, one can arrive at an implied average payment rate per hundredweight of milk. However, due to the 2-tier structure of the program, there can be large volumes of milk enrolled in catastrophic coverage under Tier II, while five million pounds are covered under Tier I at higher levels. As a result, states with a larger share of large operations will result in a lower average payment rate, while states with a larger share of smaller operations can result in higher payment rates. Figure 7 examines this difference between states and shows a higher concentration in smaller operations in the Midwest, New England and the South, while more of the states with larger operations are concentrated in the West and the Southwest

Looking ahead, 2020 enrollment is rapidly approaching as well. For 2020, dairy producers can sign up for coverage under DMC October 7 through December 13, 2019.

Summary

With slightly more than a week to go, approximately 71% of dairy producers with FSA production history have enrolled in DMC, somewhat surprising considering the significant improvements in the program made in the 2018 farm bill and the certainty of program payments to dairy farmers. USDA has developed a decision aid tool to help producers understand the program and determine the best coverage options.

For 2019, producers who enrolled their first 5 million pounds of milk at $9.50 coverage levels under Tier I are guaranteed to enhance their dairy farm income as program payments exceed premiums. For example, a producer enrolling 5 million pounds under Tier 1 at the $9.50 coverage level would pay at most a premium of $7,500. Payments already triggered for the year would amount to $27,083, generating $19,583 in program payments to the dairy operation (less administrative fees). It is important that producers participate in this comprehensive program to fully realize the potential benefits. Additionally, 2020 sign-up opens October 7 for farmers who opted not to enroll for the full five years, so get ready for the next round of DMC signup.