The financial situation for dairy producers has improved as milk prices gained more than $4 per hundredweight during 2019. The DMC (Dairy Margin Coverage) margin rose from $7.71 per hundredweight in January 2019 to $12.21 per hundredweight by November 2019. The rise in the DMC margin . . . which reduced the likelihood of payments in 2020 . . . came as dairy producers were making decisions about their 2020 DMC participation.

The 2020 outlook for milk markets has generally expected the positive news to continue in terms of higher milk prices and reasonable feed costs. USDA’s estimate for the 2020 U.S. All-Milk price currently stands at $19.25 per hundredweight, a gain of 65 cents per hundredweight over the 2019 level. If the outlook for milk and feed prices holds, there will be few if any DMC program payments in 2020.

Sign-ups down 35%
The data on 2020 DMC program sign-up shows that farmers reduced their DMC coverage for 2020 in response to the higher current and projected DMC margin level. Unlike the 2019 DMC decision, when producers already knew a good number of the actual monthly margins, this year’s decision had to be made purely based on expectations. USDA data shows that 180.7 billion pounds of DMC production history was covered in 2019, while for 2020, USDA currently estimates that 117.6 billion pounds of DMC production history is enrolled.

The 63 billion-pound decline in DMC production history enrolled from 2019 to 2020 shows that DMC is playing a much smaller risk management role for dairy producers in 2020. This makes sense given the higher margins projected.

Risk management still a must
The fact that producers have chosen to minimize their use of the DMC program in 2020 does not mean risk management is not needed. Markets can change rapidly.

For example, milk prices could decline if the global economy slips into a recession. Feed prices could rise if unfavorable weather unfolds. Although the risk of downside events may be minimal in 2020, they could yet occur.

The examination of other risk management options becomes more important with the lower use of the DMC program. If producers have not used any other risk management tools to offset the reduction in 2020 DMC program use, they remain completely exposed to downside margin events.

The premium cost associated with DMC participation could be a small price to pay to protect against downside margin events.

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(c) Hoard's Dairyman Intel 2020
February 3, 2020
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