Dairy Margin Coverage- A 2023 Risk Management Tool

by Jason Hartschuh, Field Specialist. Dairy Management and Precision Livestock

Originally written for Farm & Dairy Newsletter

The Dairy margin coverage, DMC, program through the Farm Service Agency sign up is ongoing through December 9, 2023. DMC has payouts when the margin between the all-milk price and the DMC feed cost falls below the selected protection level of $4-9.50/cwt.

Now is the time to consider if this program will improve your risk management in 2023. For the current year, 2022, 73.17 percent of Ohio dairy farms signed up for some level of coverage. While the first half of 2022 had strong margins well above $9.50/cwt, margins but fell below the $9.50/cwt level in August to $8.08/cwt and in September was $8.62/cwt. Current forecast, are for DMC to have possible payouts for the rest of 2022. These lower margins are predicted to continue into 2023.

With margin payouts currently forecast for all of 2023 reviewing the DMC program could be beneficial for your operations bottom line. Table one shows the current forecasted all milk price, feed price, and the forecasted DMC margin for each month of 2023 from the Dairy margin decision tool. The forecasted all milk price has a high of $22.13/cwt in January and bottoms out at $21.52/cwt in July with a yearly average of $21.80/cwt. At the same time forecasted average yearly feed cost is $13.68/cwt reaching its highest in January at $14.57/cwt and its lowest really depends on next year’s crop but is currently seen in December at $12.97/cwt. After reviewing these milk and feed cost forecast the margin forecast between the two ranges from $7.56-8.98/cwt. After reviewing table 1 you can start to make informed decisions about what level of margin coverage to utilize.

Table 1

Jan $22.13 $6.47 $329 $424.44 $14.57 $7.56
Feb $22.06 $6.42 $329 $417.91 $14.47 $7.59
Mar $21.98 $6.40 $306 $412.49 $14.09 $7.89
Apr $21.79 $6.38 $293 $410.08 $13.87 $7.92
May $21.58 $6.36 $293 $407.18 $13.83 $7.75
Jun $21.56 $6.32 $287 $405.77 $13.69 $7.87
Jul $21.52 $6.29 $284 $405.36 $13.62 $7.90
Aug $21.62 $6.18 $284 $404.01 $13.49 $8.13
Sep $21.69 $6.04 $282 $400.28 $13.28 $8.41
Oct $21.74 $5.93 $281 $394.60 $13.10 $8.64
Nov $21.93 $5.86 $291 $390.70 $13.14 $8.79
Dec $21.95 $5.77 $285 $391.33 $12.97 $8.98
2023 $21.80 $6.20 $295.22 $405.35 $13.68 $8.12

October 25, 2022 margin forecast from dmc.dairymarkets.org

DMC, is a two tiered program with you needing to make decision on your production history below 5 million pounds, separate from your production above 5 million pounds. The premium cost for the first 5 million pounds is much more reasonable with the $9.50/cwt coverage level costing $0.15 per cwt. With the current forecast on 5 million pounds of coverage the producer premium is about $7,481 but the net total payout is about $68,884. The premium cost is covered by the first two months’ payout.

For production over 5 million pounds the maximum coverage is $8.00/cwt but the premium is $1.813/cwt. This coverage needs thought about carefully. While there are multiple months below the $8.00 margin level, the margin does not currently appear to fall low enough to cover the cost of the premium for production over 5 million pounds. Meaning you may only want to use the $4.00 margin coverage that does not have a premium or maybe the $5.00 margin which has a premium of $0.005 per cwt in case the margin gets even worse for production history over 5 million pounds. Remember this is only a forecast hopefully milk price improves and so does income over feed cost margins so that the program doesn’t have payouts for all of 2023.

DMC, program does allow producers to participate in the other subsidized risk management program that are administered through USDA-RMA. Those programs include the Dairy Revenue Protection program which allows producers to use a Class III, Class IV or Component blend futures-based program to set a floor under their milk price by quarter. Another program more like DMC is Livestock Gross Margin-Dairy that allows producers to use class III milk, corn, and soybean meal futures to lock in a margin above feed cost. These programs are available to all producer regardless of pounds of milk shipped per month but could be a much better option for production over 5 million pounds.

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