The Dairy Margin Coverage Program Ben Brown June 17, 2019

Federal Dairy Programs- Addressing the Need Outline of Risk Management Options for Dairy Producers What conditions have occurred to create various government programs Private and Public Risk Management Options Self Insure Futures and Options Dairy Margin Coverage (DMC)- Old MPP Partnership with other producers through cooperatives Livestock Gross Margin Insurance- Dairy Dairy Revenue Protection Current market conditions and the impact of DMC Understanding the DMC Program Participation and election decisions of DMC Photo Credit- Ohio Farm Bureau

The Mechanics of DMC Under the hood If you lift up the hood and look in, the program mechanics are very similar to the Margin Protection Program. Same basic concept- based on margin between milk and feed prices Farms must choose a coverage level and pay the associated premium- higher coverage levels have a higher premium, but trigger more frequent. Can only cover a percent of historical production Most program functions were changed to make it more farmer-friendly. The one exception is that historical milk production was left the same as MPP. Photo Credit- American Dairy Association

DMC- Changes from MPP Coverage levels for Milk in Tier I Added $8.50, $9.00, and $9.50 Changes to Tier I and Tier II Premiums (Lower for Tier I) Higher level of milk production coverage Did not change production history- still highest of 2011, 2012, or 2013 Ability to dual participate in the Livestock Gross Margin Program Review of Feed Costs Review of corn silage vs corn and the price of high quality alfalfa Cash Back or Premium Credit for Producers who enrolled under MPP

Production History- Stayed the Same Producers will retain the SAME production history if they participated in MPP. This was the highest of 2011, 2012, or 2013 You will get to keep all the production “bumps” released by USDA There will be no more “bumps” in production history If you are a new operation since 2013, FSA will help you estimate your production history. If you’ve expanded in the last couple of years- it is still the same production history you had before. However……. Photo Credit- Dairy Processing Handbook

Amount of Milk Covered- Increased Tier I Coverage increased from 4 million pounds to 5 million pounds. This change was made in the Budget Bill at the start of 2018 Producers can elect to cover a percentage of their historical production. Between 5% and 95% (Previously was 25%-90%) Photo Credit- American Dairy Association Mid-East

New Premiums and Coverage Levels Tier 1 MPP-Dairy 2018 Tier 2 DMC Eligible Production 4 mil. lbs. or less 5 mil. lbs. or less Above 4 mil. lbs. Above 5 mil. lbs. $4.00 $0 $4.50 $0.0080 $0.0200 $0.0025 $5.00 $0.0190 $0.0400 $0.0050 $5.50 $0.0300 $0.0090 $0.1000 $6.00 $0.0410 $0.0160 $0.1550 $0.0500 $0.3100 $6.50 $0.0680 $0.2900 $0.0700 $0.6500 $7.00 $0.1630 $0.0630 $0.8300 $0.0800 $1.1070 $7.50 $0.2250 $0.0870 $1.03 $0.0900 $1.4130 $8.00 $0.4750 $0.1420 $1.36 $1.8130 $8.50 N.A. $0.1050 $9.00 $0.1100 $9.50 $0.1500 Taken from the Farm Service Agency release rules

Premiums- Graphically

Tier II- Graphically

Example: Buckeye Farms Buckeye Farms has a Base Milk Production of 4,500,000 lbs. They Elect to cover 90% at $9.50 Coverage Level Covered Milk = (4,500,000 x 0.90)= 4,050,000 lbs. or 40,500 cwt The program assumes the same production each month (40,500/ 12) = 3,375 cwt. The differences between the U.S. all milk prices and feed prices for Jan. Feb. and Mar. are already know. January- $7.99, February- $8.22, and March - $8.85 Subtracting 9.50 from each and multiplying by 337,500 and adding up gets us the total payment thus far. January = $5,096, February = $4,320, and March = $2,194 Total = $11,610 Premium was $0.15 per cwt. ($0.15/cwt x 40,500)= $6,075

Objective: Avoid Tier II Coverage For farms above 5 million pounds of historic production- choose a coverage level that gets you closest to 5 million pounds. 10 million pounds, choose 50% = 5 million pounds 23 million pounds, chose 20% = 4.6 million pounds Producers that select $8.00 coverage level or less in Tier I, then they MUST select the same coverage level in Tier II Producers that select $8.50 coverage level or above in Tier I, may select a different coverage level in Tier II. Photo Credit- Farm and Dairy

DMC- Strategy Coverage Level Tier 1 DMC Tier 2 Eligible Production 5 mil. lbs. or less Above 5 mil. lbs. $4.00 $0 $4.50 $0.0025 $5.00 $0.0050 $5.50 $0.0300 $0.1000 $6.00 $0.0500 $0.3100 $6.50 $0.0700 $0.6500 $7.00 $0.0800 $1.1070 $7.50 $0.0900 $1.4130 $8.00 $1.8130 $8.50 $0.1050 N.A. $9.00 $0.1100 $9.50 $0.1500 Tier I coverage is inexpensive at any level. Insure as much as you can. Above 5 million lbs.? Then pick a coverage level above $8 so you can do a lower on in Tier II. If above 5 million lbs, the $5 coverage level is the same as Tier I, but jumps 10 cents for $5.50 Big Jump

DMC-Discount for multi year enrollment Option 1- Elect for annual sign-up. Option 2- Elect coverage once for all 5 years of the Farm Bill and receive a 25% discount on premiums. There are also discounts for rebates on old MPP premiums (difference between payment and premium for (2014-2017) 75% of the difference if taken as a credit for DMC 50% of the difference if taken as cash Photo Credit- Morning Ag Clips

Does the New Coverage Levels Matter?? Author Calculations based on Data from USDA- NASS, AMS, and FSA

Does the New Coverage Levels Matter?? Author Calculations based on Data from USDA- NASS, AMS, and FSA

Concurrent Participation with LGM- Dairy Could not do both under MPP. Low participation in Ohio last couple of years, but now more attractive. Photo Credit- USDA- RMA

DMC- Observations Futures, Options, Forward Cash Contracts, LGM-Dairy and Dairy RP are all tied to futures market sentiment Consider needs in liquidity Requires active management A marketing plan to take the emotion out is important DMC- A federal program that does not depend on future market sentiment Set it (maybe for five years) and forget about it Based on feed and milk prices that happened in the last month Photo Credit- Ohio Dairy Veterinarians

Questions? Photo Credit- Krauss Dairy, Ohio State University

This material is based upon work supported by the USDA-NIFA under Award Number 2018-70027-28586 and prepared by Ben Brown- The Ohio State University College of Food Agriculture and Environmental Sciences with reference of information to Andrew Novakovic at Cornell University and Mark Stephenson, Director of Dairy Policy Analysis at University of Wisconsin