With sign-up for the 2022 Dairy Margin Coverage Program (DMC) approaching, it is again time for producers to consider what level of future participation will be most beneficial to their operation. For producers who are already locked into coverage levels through 2023 based on making a previous multi-year decision to take advantage of a premium discount, forthcoming details about a retroactive change to the DMC formula calculation could affect your payment amounts as well.

In August, USDA released some information regarding a change to the DMC feed cost formula to better account for the actual cost of high-quality alfalfa. The change will be retroactive to January 2020 and is estimated to provide about $100 million in additional payments for the past two years. Though USDA has yet to release these details as of the second week of October, more information is expected soon.

In the meantime, it is informative to analyze the contribution of alfalfa prices to DMC margins in recent years and consider how future changes may affect program operation. USDA began publishing prices for premium and supreme alfalfa hay in 2019. Since its inception, this high-quality alfalfa price has averaged $29 per ton higher than the traditionally reported alfalfa hay price . . . ranging from just $18 higher in May 2019 and July 2020 to $45 higher in February 2019.

Making an alfalfa forecast

The current DMC formula considers the average of both alfalfa price series. While awaiting further details from USDA regarding how the new formula will be calculated, let’s assume for the sake of discussion that only the premium and supreme price for alfalfa will be used in the new formula. This will give potential outcomes for how payments made since January 2020 may increase.

Using this assumed change to calculate margins from January 2020 to August 2021 results in a margin that is on average 20 cents lower. Accounting for the fact that not all months have triggered payments since January 2020, those signed up for $9.50 coverage would receive on average 13.5 cents more per hundredweight of covered production, while those signed up at the $6.50 DMC coverage level would receive 7.5 cents more.

While we must wait for USDA to reveal the final details of changes to the DMC program, the important thing to realize is that new information is coming soon that will not only affect the decision for 2022 DMC sign-up, but also could retroactively increase payments for those enrolled in DMC in 2020 and 2021.

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(c) Hoard's Dairyman Intel 2021
October 18, 2021
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