As the farm bill debate continues, examining how the Dairy Margin Coverage (DMC) program has operated — particularly what has triggered payments under the program — is instructive. This analysis looks at whether low milk prices, high feed costs, or the combination of both caused a DMC payment to be triggered at a $9.50 coverage level over the 2010 to 2023 period. Low milk prices are defined as milk prices below the 2010 to 2023 average of $19.12 per hundredweight (cwt.), while high feed costs are defined as feed costs exceeding the 2010 to 2023 average of $10.55 per cwt. calculated using the DMC feed cost calculation.

Though DMC was not in operation before the passage of the 2018 Farm Bill, this analysis considers how the program would have operated if it had been in place since 2010 and does not consider how the operation of the program might have altered the milk and feed prices that occurred prior to 2018. The historical time period chosen for the analysis is critical to the outcomes, and if a different time period was analyzed, the results shown here could change.

The graph shows a summary of payments at different DMC payment levels. For example, the leftmost bar in the chart shows the combination of margin components responsible for a payment of 50 cents or less. In this case, low milk prices triggered payments in two-thirds of the outcomes. The numbers in the parenthesis are the number of months between 2010 and 2023 that a payment in that range was triggered.

Looking at this graph, it is important to consider possible DMC payment levels over the next few years. Feed costs should continue to ease if better weather unfolds during the 2024 growing season. DMC feed costs for the last quarter of 2023 averaged $12.15 per cwt., which was $3 per cwt. lower than the first quarter of 2023 and just $1.60 per cwt. above the 2010 to 2023 average.

The graph shows that triggering larger DMC payments requires low milk prices and high feed costs (80% of the time that a $4 or greater payment was triggered, it was due to both high feed costs and low milk prices). If feed costs continue to move lower, low milk prices can still trigger DMC payments, but they have tended to be smaller, “shallow loss” payments. Low milk prices without high feed costs only led to payments above $3 per cwt. four times out of the 168 months from 2010 to 2023.

Risk management will continue to be important for dairy farmers. Understanding how DMC might operate moving forward is useful as milk producers look at all options to mitigate risk.

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(c) Hoard's Dairyman Intel 2024
February 12, 2024
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