The 2018 farm bill created the Dairy Margin Coverage program as a safety-net program for dairy producers.  DMC is an upgrade to the Market Protection Program in the 2014 farm bill. The DMC program builds on the enhancements which were made to MPP in the 2018 Bipartisan Budget Act, which made the MPP program more affordable for many dairy producers. Similar to MPP, the DMC program is a margin-based program, which is calculated on the income over feed cost margins on a monthly basis.

Sign-up for the new DMC program will begin on June 17 and will continue until Sept. 30 at local Farm Service Agency offices. DMC payments are scheduled to begin after July 8 and DMC payments to eligible dairy producers will be made retroactively back to Jan. 1, 2019.

DMC is a voluntary program which requires dairy producers to choose production and price coverage levels at various premium rates. There were some fairly significant improvements in the DMC program, as compared to the previous MPP program, in providing a safety-net program for dairy producers. There is especially enhanced risk protection for those producers for smaller-sized dairy herds under 250 cows. However, the new DMC program also provides more flexibility for larger dairy operations.

DMC program highlights

Dairy producers now have a coverage level choice up to 95 percent of production history. (MPP maximum coverage level was capped at 90 percent of production history.)

Three new Tier 1 price coverage levels are set at $8.50/cwt., $9.00/cwt., and $9.50/cwt. (MPP top price coverage level was $8.00/cwt.)

Tier 1 DMC coverage goes up to 5 million pounds of production (approx. 200-230 cows). (MPP Tier 1 maximum was 4 million pounds.)

The DMC program provides more flexibility, allowing larger dairy farms to select different coverage levels for Tier 1 and Tier 2 coverage (if they select the $8.50/cwt. coverage or higher for their Tier 1 coverage). They can take advantage of the improved DMC coverage on the first 5 million pounds and opt for lower coverage levels on the balance of the production. (MPP required that all coverage be at the same price level, which is still required under DMC when the Tier 1 coverage level selected is $8.00/cwt. or lower.)

The program provides a 25 percent premium discount for dairy producers who make a one-time, five-year (2019-2023) enrollment into the DMC program. No premium repayment is required if producers exit the business early.

DMC premiums are more affordable than with the original MPP. Producers can purchase the $9.50/cwt. coverage for an annual premium of $.15/cwt., which is reduced to $.1125/cwt. when utilizing the premium discount (referenced earlier). The DMC premium for $8.00/cwt. coverage is $.10/cwt., or $.075/cwt. with the premium discount. (The $8.00/cwt. coverage under the MPP program had a premium of $.142/cwt.) Larger dairies which opt for Tier 2 DMC coverage can receive $5.00/cwt. coverage for a premium of $.005/cwt., or $4.00/cwt. coverage for free.

DMC also allows for 75 percent of the MPP premiums paid from 2014-2017 to be applied as a premium credit for DMC enrollment. Producers also have the option to take 50 percent of the MPP premium payment as a one-time cash payment, as an alternative to the DMC premium credit.

Dairy producers may enroll in both the DMC program and either the Livestock Gross Margin or Dairy Revenue Protection program, which are RMA crop insurance type programs. (With MPP, producers had to choose either MPP or LGM coverage, but could not enroll in both.)

Please refer to the accompanying table for a side-by-side comparison of the new Dairy Margin Coverage program and the former Market Protection Program.

The Minnesota DMC Premium Rebate Program

The Minnesota Legislature approved legislation, which was signed into law by Governor Tim Walz, to partially rebate dairy producers for the premium costs of the DMC program. The rebate program authorizes up to $8 million to assist Minnesota dairy farmers with the DMC premiums for 2019, the first year of the program. The premium rebate program will cover the first 5 million pounds of historical annual milk production (Tier 1 coverage) and will be capped at $9,000 per farm. Dairy farms with annual production above 16 million pounds (approximately 750 cows) will not be eligible for the rebate program. It is estimated that about 98 percent of Minnesota dairy farms will be eligible for the rebate program.

In order to be eligible for the rebate, dairy producers must sign-up for all five years of the DMC program (through 2023) at their local FSA office, and must provide proof of sign-up with their rebate application. Contact the Minnesota Department of Agriculture for more details.

Impacts of the higher Tier 1 price coverage

Under MPP, many dairy producers selected Tier 1 coverage at either the $6.50 or $8.00 per hundredweight coverage levels for 2015 to 2018. Based on USDA data, MPP payments only occurred in 4 percent of the months during that time period at the $6.50/cwt., and in 41 percent of the months at the $8.00/cwt. level.

The DMC program now offers higher price coverage level options of $8.50, $9.00, and $9.50 per hundredweight. Had the DMC program been in place from 2015 to 2018, DMC payments would have occurred in 52 percent of the months at $8.50/cwt.; 63 percent at $9.00/cwt.; and 80 percent of the months at $9.50/cwt.

The maximum DMC coverage price is $9.50/cwt., which is 117 percent above average MPP/DMC margin over the past ten years of $8.11/cwt. The average MPP/DMC margin over the past five years has been $9.51/cwt., which correlates to the new maximum DMC price coverage level. It should be noted that the five-year average was more impacted by the record high margin level in 2014. Past price margins are not necessarily a predictor of future DMC program payments. However, based on current trends in the margins, the $9.50/cwt. level should provide a considerably improved safety-net.

Preliminary 2019 DMC results

As mentioned earlier, the 2019 DMC payments will be retroactive back to Jan. 1 once they begin in July of 2019. The DMC payments are calculated on a monthly basis, so we already have the results for January, February and March of 2019. Based on the DMC income over feed cost formula, the DMC payments for the first three months of 2019 would be as follows: January, $1.51/cwt.; February, $1.28/cwt.; and March, $ .65/cwt.

To cite an example, a dairy herd producing approximately 3 million pounds per year (30,000 cwt.), or 2,500 cwt. per month (equates to a dairy herd of approximately 125 cows), the DMC payment formula would equal the monthly payment rate multiplied by the percentage of coverage  multiplied by monthly average production ($1.51/cwt.  times  95 percent times  2,500 cwt.  equals a DMC payment of  $3,586.25). Estimated 2019 DMC payments for the example herd (3 million pounds annual production) would be January, $3,586.25; February, $3,040.00; and March, $1,543.75; for a three-month total of $8,170.00. Note: DMC payments will be subject to a federal sequestration payment reduction of 6.2 percent. The DMC premium formula equals annual production  times the percentage of coverage  multiplied by the premium rate. For example, 30,000 cwt.  multiplied by 95 percent (28,500 cwt.)  times $.15/cwt.  equals and annual DMC premium of $4,275. Note: There is a 25 percent premium reduction for five-year DMC enrollment. Minnesota dairy producers are also eligible for the special DMC premium rebate program.

A DMC decision tool

USDA has developed a free online decision tool to assist dairy farm operators with their calculations and decisions regarding the new DMC program. The decision tool is available at:

www.fsa.usda.gov/programs-and-services/farm-bill/farm-safety-net/dairy-programs/dmc-decision-tool/index

Dairy producers should contact their local FSA office for information and details on sign-up for the DMC program.

The bottom line

The combination of the enhanced price risk protection available under the new DMC program, along with the added DMC premium incentives, make enrollment in the DMC program for 2019-2023 almost a “no-brainer” for small to medium-sized dairy operations. This decision is further strengthened by the fact that the announced DMC payment levels for the first three months (Jan., Feb. and March) of 2019 will be more than double the 2019 premium levels for entire 2019 year. Of course, many Minnesota dairy farmers may have very little 2019 DMC premiums, due to the State’s premium rebate program. It’s hard to predict what will happen to dairy prices and margins for the entire five-year period (through 2023), but out of the gate, the DMC program looks like a greatly-improved risk management tool for dairy producers.

Kent Thiesse is a government farm programs analyst and a vice president at MinnStar Bank in Lake Crystal, Minn. He may be reached at (507) 726-2137 or kent.thiesse@minnstarbank.com.