Dairy Risk Management Tools Remain Key as 2022 Approaches – Applications for Additional Dairy Margin Coverage Open

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The ripple effects of the COVID-19 pandemic continue to impact dairy farmers. In a previous article on dairy, we discussed the network of pandemic-related market conditions that triggered Dairy Margin Coverage (DMC) payments for the seventh consecutive month. Unsurprisingly, tight margins primarily related to high feed costs persist and have, once again, triggered DMC payouts for the eighth, ninth, 10and and 11and consecutive months, until last October.

The Dairy Margin Hedging Program provides a level of risk protection to dairy producers when milk prices are low and/or feed costs, on average, are high. This voluntary program provides payments when the calculated national margin falls below the coverage threshold selected by a producer. The margin is the difference between the average feed price (the price of hay, corn and soybean meal) and the national price of all milk.

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October’s DMC margin was $8.77 per cwt, $3.52 above August’s record low of $5.25 and the largest margin since November 2020. A slight drop in flour prices from corn and soybeans in recent months contributed to the lowest weighted average cost ($10.93) since February. That said, cornmeal and soybean meal costs remain above the past five-year average, in part due to widespread supply chain shortcomings, ranging from labor shortages and rising from input costs to delayed and costly transport obstacles. Alfalfa prices continued their upward trend. Eight of the top 10 hay-producing states remain affected by severe widespread drought, with farmers reporting declines in crop yields ranging from 26% (New Mexico) to 64% (Montana) lower than last year.

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2021 dairy cow inventories fell below 2020 levels for the first time in October (Figure 3). The 14,000 head reduction from October 2020 resulted in an 88,000 lb (0.5%) drop in milk production over the same period. This year-on-year decrease of 14,000 head matches last month’s decrease and combines into a total decline of 107,000 head since the peak in May 2021 – the largest national herd size recorded in more than 20 years. In particular, the last milk production report put milk production per cow at 1,970 pounds in October 2021, a decrease of 6 pounds from October 2021. Even with a slight supply crunch, DMC dairy margins triggered payouts for producers with elections at the highest level of coverage. A continued decline in milk supply could push prices higher in 2022, although producer-level spending remains inflated, limiting expectations for improved margins. The recent Estimates of world agricultural supply and demand increased the forecast average Class III milk prices for 2021 by 10 cents to $17.05 per cwt (cwt), the average Class IV price for 2021 by 5 cents to $16.05 per cwt and the price of all milk for 2021 from 10 cents to $18.60 per quintal. Class III and IV forecast prices for 2022 were also increased by 30 to 40 cents to $18.15 and $19.00/cwt, respectively. The DMC remains a safety net widely used by more than 75% of dairy farmers across the country, given its protection against price uncertainty.

A recent USDA Press release announced that applications for the Supplemental Dairy Margin Coverage (SDMC) program would be accepted from December 13 to February 18. calculation (milk marketing 2011-2013) has been promulgated. The new policy allows farms to opt for higher milk production coverage if changes in herd size have been made since the 2011-2013 base years (up to a limit of 5 million pounds). For this extension of coverage, $580 million has been reserved. It will apply to calendar years 2021 (retroactively), 2022 and 2023. After making changes to production history under SDMC, producers can apply for traditional DMC coverage from 2022. This means that future DMC contracts will include the updated production history figures that reflect 2019 releases.

Additionally, the Farm Service Agency (FSA) has adjusted the calculation of alfalfa in the weighted average feed cost figure by using 100% premium quality alfalfa hay instead of 50% in hopes of making future DMC payments more representative of dairy expenditure. This change reduced DMC’s dairy margins by an average of $0.22/cwt per month, due to an average $15.95/tonne increase in alfalfa prices under the updated 2021 formula. For example, in October, DMC’s margin fell from $8.77/cwt to $8.54/cwt under the adjustment. This will allow registered producers to retroactively recoup payments they would have been entitled to under the feed cost formula change – if the difference was significant enough to trigger a higher level of payment covered by their plan. The FSA estimates that the formula change will result in additional payouts of $108.47 million for the January 2020 to September 2020 payout period. A three-year payout estimate (2021 to 2023) is $335.43 million. dollars and the estimated payout over 10 fiscal years (2021 to 2030) is $705.32 million. The FSA will use adjusted alfalfa prices when calculating future SDMC and DMC payments and will reimburse growers retroactively to January 2020.

On the Dairy Revenue Protection (DRP) side, claim payments are down from 2020 while program uptake is up. The DRP is an area-based federal crop insurance product that provides quarterly revenue coverage to dairy producers. The quarters available for coverage correspond to the quarters of the calendar year, ie January to March, October to December. Under the DRP, an indemnity is paid to a dairy farmer if the actual income from the milk falls below a guaranteed final income established beforehand.

As of November 22, 2021, 18,773 DRP policies had been sold, compared to 2020’s total of 15,022 policies sold. This is a jump of 3,751 policies sold, with the biggest jumps in New York (+1,053), Pennsylvania (+642) and California (+445). With 3,980, or 19%, of the 2021 endorsements compensated, $95 million in payments have been made. Figures 4 and 5 display the percentage of endorsements compensated in each state for 2020 and 2021, respectively. Although milk prices experienced volatility throughout 2021, they did not compare to the peaks and troughs of 2020, which resulted in more extreme payouts. Notably, average Basic Class I prices have remained on a marginal upward trend, starting at $15.14/cwt in January 2021 and most recently at $19.17/cwt for December, reducing the likelihood of payouts. DRP.

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Speaking of Class I prices, farmers recovering from imbalanced Class I incomes tempered optimism about the USDA’s new Pandemic Market Volatility Assistance Program (PMVAP) and its ability to fill gaps. gaps left by last year’s unbundling. Since the 2018 Farm Bill, the price of Class I milk, i.e. milk used to produce beverage dairy products, is calculated using the simple average of Class III skim milk prices (cheese ) and Class IV (milk powders) advanced plus 74 cents . In previous years, the formula was the highest advanced price for Class III and Class IV skim milk. As shown in Figures 5 and 6, in 2020 this change in Class I formula, combined with pandemic-induced price volatility, resulted in a massive reduction in prices compared to what would have happened with the old formula: The formula change resulted in a $736 million reduction in the federal order pool in 2020, resulting in widespread negative producer price differentials.

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To address these perceived losses, on August 19, the USDA announcement PMVAP, which is expected to provide $350 million in pandemic relief payments to dairy producers who received lower value for their milk (primarily from Class I suppliers) due to market anomalies (widespread unbundling) caused by the pandemic. Program payments “will reimburse qualified dairy farmers 80% of the revenue difference per month based on annual production of up to 5 million pounds of marketed milk and fluid milk sales from July to December 2020. “. The USDA is currently working with individual managers to come up with a single payment plan for affected growers. Eligible handlers would be all handlers who paid producers who pooled milk in 2020. The USDA chose to channel payments through handlers and to producers to reduce USDA administrative burdens and take advantage of previous payment processes already used by the handler. The exact method managers will use to broadcast payments will depend on the particular methods used to bundle, mix and pay farmers during the pandemic. Given concerns about transparency, the USDA assured that a full audit process would be in place to ensure that farmers receive their payments and that managers do not retain any of the funds except for the limited allocation for farmer education. The PMVAP drew initial criticism from farmers over its £5m limit and adjusted gross income limits. Others praised it for its educational requirements that include funding for farmer training related to a better understanding of the federal ordinance system, risk management options, conservation and other relevant dairy topics. Above all, the PMVAP is an attempt to alleviate some of the burden of pandemic-related market disparities.

Conclusion

Risk management programs remain a vital safety net for dairy farmers still reeling from pandemic-induced market conditions. Higher-than-average feed prices linked to widespread supply chain challenges will continue to put pressure on dairy margins, making the 2022 Dairy Margin Cover a recommended buy for most farmers entering the market. the new Year. Regardless of lower payouts in 2021, the uncertainty surrounding milk prices will also keep dairy income protection relevant for farmers looking to protect against unexpected price declines. In addition, the Pandemic Market Volatility Relief Program, although outside the scope of any risk management program, will attempt to fill the gaps left by unbundling and negative output price differentials by 2020. Going forward, farmers will keep risk management options in mind, with a particular focus on opportunities that can protect against COVID-19-like events.

Contact:

Daniel Munch
Associate Economist
(202) 406-3669
[email protected]

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