The Dairy Margin Coverage (DMC) program is a “safety net” program supported by the Agriculture Improvement Act of 2018, also known as the farm bill. Through DMC, dairy farmers can protect or cover their enterprises against low margins due to low milk prices, high feed costs, or a combination of the two. It is worth highlighting that, although substantially amended, DMC replaced the Margin Protection Program (MPP)-Dairy released in the 2014 Farm Bill.
Under the context of DMC, the margin is the difference between the All-Milk price and feed costs. To determine the feed costs, DMC uses an equation that includes three variables: the price of corn, the price of soybean meal, and the price of alfalfa hay. One of the most relevant changes of DMC compared to MPP-Dairy is the pricing of alfalfa hay. While MPP-Dairy utilized the U.S. alfalfa hay price, DMC implemented a five-state Premium and Supreme alfalfa hay price. The latter represents a weighted average price for the five largest milk-producing states.
More sensitive
While waiting for the next farm bill to be passed, we evaluated the impact of changing the alfalfa pricing structure on DMC margins. The figure below depicts the margin from January 2019 to August 2024 using the two hay prices. The orange line depicts the margins reported by DMC using the five-state Supreme and Premium alfalfa hay price. The maroon line depicts the margin using the U.S. alfalfa hay price and represents the hypothetical margin according to MPP-Dairy.
From this figure, I will first highlight that using the five-state Supreme and Premium alfalfa hay price resulted in a 58 cents per hundredweight (cwt.) lower margin than when using the U.S. alfalfa hay price, and this difference ranged from 25 cents per cwt. to $1.25 per cwt. These data mean that amending the safety net through alfalfa hay pricing successfully helped improve the program. Further evidence of this is that under DMC, the margins of June and July 2023 were below the catastrophic margin ($4 per cwt.). However, under the MPP-Dairy, these hypothetical margins were above that threshold and, therefore, would not have triggered any payments.
Another change of DMC relative to MPP-Dairy was raising the threshold to trigger payments from $8 per cwt. (black broken line) to $9.50 per cwt. (red broken line). Under DMC, the program triggered payments in 38 out of 68 months, whereas under MPP-Dairy, only 19 of the 68 months would have triggered payments. This observation clearly shows that this amendment successfully made the program more sensitive.
We are still waiting for the new farm bill to pass. Until this happens, it is still uncertain whether dairy farmers will have DMC as a safety net program (although the Farm, Food, and National Security Act of 2024 under evaluation includes some language about DMC). In the meantime, I hope this retrospective analysis helps dairy farmers make better decisions when the program is released. I thank the Southern Extension Risk Management Education program for supporting our efforts to provide this analysis to dairy farmers.
