Sign-up for the new Dairy Margin Coverage (DMC) program is rapidly approaching, and the 2019 decision is easy given the data already known for the first few months of this year. For this year, dairy producers should sign up at the $9.50 level on their first 5 million pounds of eligible production history.
However, the best participation decision over the 2020 to 2023 period is less clear. With that said, dairy producers will need to decide soon whether it makes sense in their operation to go ahead and sign up for all five years to take advantage of the 25 percent discount on premiums they will receive for locking in a choice for the entire period.
DMC participation is often cast in the light of how to maximize monies paid to producers relative to the premiums they pay under the program. However, the ability to protect downside financial risk that occurs through low milk prices or high feed costs should not be overlooked. Even when current market conditions suggest there is little reason to participate at higher margin coverage levels, margin situations can change rapidly. That occurred last year when the six-month average for Class III futures contracts dropped $1 per hundredweight (cwt.).
Shocks to prices
The perfect example is unfolding this year as wet conditions have created a near impossible task for many when it comes to getting corn planted. The amazing piece of this puzzle for DMC is just how quickly expected corn prices and therefore the expected DMC margin has changed.
On May 10, the September 2019 corn futures contract closed at $3.61 per bushel. At that time, the corn market tended to be trending lower with lackluster demand and large corn plantings expected. On May 30, that same September corn futures contract closed at $4.45 per bushel. In just 20 days, corn futures gained 86 cents per bushel. If these corn prices are realized this fall, that equates to a 92-cent reduction in the DMC margin over a three-week window.
The point is crystal clear, agricultural markets move swiftly and drastically when large market shocks unfold. Even futures markets can become poor predictors of expected market prices during these volatile periods.
You will know the premium cost you have to pay with certainty. The most important question to ask is whether that premium cost is a good expense for your operation to protect against the downside margin risk that’s always possible in dairy and feed markets.