1. The Dairy Margin Coverage Program
Ben Brown
June 17, 2019

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. Premiums- Graphically

9. Tier II- Graphically

10. 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

11. 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

12. 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

13. 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 ( )
75% of the difference if taken as a credit for DMC
50% of the difference if taken as cash
Photo Credit- Morning Ag Clips

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

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

16. 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

17. 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

18. Questions?
Photo Credit- Krauss Dairy, Ohio State University

19. This material is based upon work supported by the USDA-NIFA under Award Number 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