1. The Dairy Margin Coverage Program
The Dairy Margin Coverage Program — a new risk management option Mark Stephenson, Director of Dairy Policy Analysis

2. Risk Management Options
Do nothing—self insure
Futures & options
Cash contract with coop or plant
Swaps
LGM-Dairy
Dairy-Revenue Protection
Dairy Margin Coverage—(Revised MPP-Dairy)

3. Does Contracting Work? USDA-AMS Study

4. Futures Markets A clearing house for information relevant to markets
Big sponge for weather, politics, general economy, production reports, etc.
They are trying to find agreement at a point in time about a future value of a product
They transfer risk for hedgers
They provide profit motive for speculators to accept risk
Provide price discovery for the rest of us
Futures markets will be wrong about the price
We have no evidence that they are biased
The closer we are to the expiration date, the more accurate a futures price is

5. Futures Markets
Options provide the right to own the underlying futures contract at a specified price
Cost of option premium reflects the likelihood of having to supply the underlying contract at the specified price
If the commodity is harder to predict future prices, the option costs more
If the expiration date is further away (we are less certain about the market conditions) the option costs more
We can used options prices to calculate the future risk of a price forecast

6. The Margin Protection Program becomes Dairy Margin Coverage

7. The Agriculture Improvement Act of 2018
Title I contains the commodity titles which have temporary authority. They will expire at the end of a Farm Bill’s life.
Subtitle D, Sec is the Dairy Margin Coverage program

8. Dairy Margin Coverage
New Name, same basic concept—based on margin between milk and feed prices
Farms must choose coverage level and pay premium— higher coverage requires higher premiums
Can only cover a percentage of historic production
Most of the parameters of the program were tweaked in some way to make it more farmer-friendly

9. Production History
You keep your same production history that you last had if you participated in the program
You get all of the “bumps” that were accumulated
If you didn’t participate previously, your production history will be established in the same way:
Highest annual production in 2011, 2012 or 2013
If you have a new operation since 2013, you can estimate production
If you got “caught” with a partial year’s production in 2013, there will be a means to establish a full year’s history
There will be no more “bumps” in production history
FSA will let you know what your production history is

10. Amount of Milk Covered
Tier 1 coverage is increased from 4 million pounds to 5 million pounds of historic production
You can elect to cover a percentage of production history from 5% to 95% (previously 25% to 90%)

11. New Premiums and Coverage Levels

12. Objective: Avoid Tier 2 Coverage
For farms with more than 5 million pounds of historic production, choose the percentage coverage that gets you closest to 5 million pounds.
Example: 10 million HP, choose 50% = 5 million
Example: 23 million HP, choose 20% = 4.6 million
If you have more than 100 million pounds of HP, choose 5%, but you will have to buy some Tier 2 coverage
If a farmer elects $8.00 coverage or less, then he/she must select the same coverage level in Tier 2
If a farmer elects $8.50 coverage or more, then he/she may select any different coverage level in Tier 2

13. Strategy Tier 1 coverage is inexpensive at any level
If you are a larger farm (more then 5 million lbs PH), always pick $8.50 or above
Cover as much Tier 2 as you want. At $5.00— it’s cheap catastrophic coverage

14. Discount Option #1: You can elect coverage each year at signup
Option #2: You can elect coverage once for the entire 5 years of the Farm Bill and receive a 25% discount on premiums

15. Coverage at $9.50*
* At $9.50 coverage, Tier 1 payments would have averaged $1.00 and would have net $0.85

16. Historic Benefit at Different Coverage

17. Net Benefit with Annual Choice

18. What Would I Do? Sign up for 5 year coverage with discount
It’s a small benefit, but use a “set it and forget it” mentality
If I’m a smaller farm (less than 250 cows), buy as much production history as I can at $ It’s inexpensive risk management, and it offers good coverage for all your milk production.
If I’m a medium to large sized farm, buy as much $9.50 coverage as you can and put the Tier 2 at $5.00 coverage. You will maximize your Tier 1 payments and you get low cost catastrophic coverage.
Consider your additional risk management needs with Dairy- RP, LGM-Dairy, futures or cash forward contracts.
There are no restrictions with DMC and other coverages

19. A Couple of Other Items…
If you paid more money into premiums under MPP than you received in indemnity payments, then you can:
Apply 75% of the difference toward DMC purchase
Receive rebate of 50% of the difference in cash
September 20th is the last day to reclaim this repayment
The 2019 DMC signup begins June 17th and ends September 20th
With the first 3 months of the year, we already know that we will receive almost 30¢ on all Tier 1 milk at $9.50 or almost 14¢ net benefit.

20. Observations DMC offers coverage regardless of market sentiment
Futures, options, cash forward contracts, LGM-Dairy and Dairy RP, are all tied to futures market sentiment
May not be able to get coverage you need
Requires active management of your marketing and risk management plans
Have a marketing plan in place to take the emotion out of choices

21. The DMC Decision Tool

22. Questions?