The Cambridge Dictionary defines risk management as “the job of deciding what possible financial risks are involved in a planned activity and how best to avoid or deal with them.” Most producers are quite familiar with the financial risks involved in the planned activity of dairy farming. One tool for helping to mitigate these risks is the Dairy Margin Coverage (DMC) program. Enrollment for 2023 is likely to be announced in the next month or two.
Need an example of the merits of this program?
Consider how dairy finances have played out thus far in 2022. DMC margins for the first half of the year averaged $11.80 with a monthly low of $10.98, well above the $9.50 threshold that results in payments under the program.
However, margins have rapidly deteriorated, falling to $9.92 in July and $8.08 in August. The August DMC payment alone would cover the cost of enrollment for up to five million pounds of milk for most producers. And, at this point, it is very likely that additional months will see DMC payments in 2022.
Few market analysts expected that DMC payments would be made in 2022 when the opportunity to enroll in the program remained open in March. The March World Agricultural Supply and Demand Estimate (WASDE) projected the 2022 All-Milk price at $25.05 per hundredweight (cwt.) along with the 2021 to 2022 marketing year average corn price at $5.65 per bushel and the soybean meal price at $420 per ton. Also, at that time, premium alfalfa prices were running in the $260 to $270 per ton range.
But in August, feed costs had spiked to $7.24 per bushel for corn, $510.90 per ton for soybean meal, and $343 per ton for Premium and Supreme alfalfa. Even an All-Milk price of $24.30 did not keep the margin large enough to preclude payments.
And that is the point of risk management . . . helping to cover possible financial risks. USDA is reporting that 72.5% of operations with established production history enrolled in the DMC program in 2022. This lagged the program enrollment of 76.6% in 2019, perhaps because of the anticipated future milk and feed costs at the time of signup.
Economists work hard and try their best to project future commodity markets, but none are perfect. Let 2022 be yet another example of the merits of risk management and not profit maximization when considering your future participation in the DMC program.