The signup deadline for Dairy Margin Coverage (DMC) is quickly approaching. The safety-net program for U.S. dairy producers, "should be the cornerstone of their risk management strategy for 2021," says Dairy Economist Marin Bozic, University of Minnesota. The signup deadline is Friday, Dec. 11, 2020.

"There are very few programs as effective as Dairy Margin Coverage in providing protection," says Bozic on a conference call Friday. "So, in addition to being a good deal or very generous in terms of the premium structure versus the return, the effectiveness of the program should not be understated."

DMC offers protection to dairy producers when the difference between the all-milk price and average feed price (the margin) falls below a dollar amount selected by the producer.

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"DMC is the improved version of the Margin Protection Program from the 2014 farm bill," says USDA FSA Administrator Richard Fordyce, who was also on the call. "Congress listened to the dairy sector and fixed a lot of things that didn't really work well under the Margin Protection Program," Fordyce says.

But enrollment for 2021 DMC is down. As of Monday, Nov., 30, 7,846 dairy operations were enrolled in DMC. "This is down from 2019 and 2020 numbers. Wisconsin has the most participants with 2,400 dairy operations followed by Minnesota at 1,000, New York at 676 and Pennsylvania with 600."

Dairy producers can enroll in DMC through local FSA offices. "There's 2,124 FSA offices scattered across the country and the local staff, especially if they have any dairy production in the county, have signed producers up before, and can help producers walk through the application and make sure they have all the necessary information," Fordyce says.

Dairy Market

Downside risks in the dairy market reinforce the need for participation in the safety-net program, Bozic says.

As COVID infection rates continue to increase along with hospitalizations, dairy demand outside the home decreases, he says. "That is going to be the downside risk on dairy markets in the short-term."

USDA's September data on domestic commercial disappearance of milk and dairy products shows respectable growth year-over-year for butter and cheese, "which is due to the intervention programs that were appropriated in 2020," Bozic says.

"There is no industry consensus about their beneficial impact to the industry in 2021. The incoming administration is also not signaling their willingness to continue to help producers with these programs. So, the commercial disappearance growth rates that have sustained cheese prices through the better part of 2020, will most likely go away in 2021."

Milk production, on the other hand, has seen tremendous growth. "In September and October, we are looking at 2.4% and 2.3% year-over-year growth grates. Nationally, anything that is 2% is a red flag and may induce depressed prices over the next nine months. When you look around the nation, we're seeing a large number of states growing aggressively.

"In Texas, we've grown accustomed to high growth rates. But even Minnesota and Pennsylvania were over 2%, and Michigan over 3%."

DMC enrollment lags behind 2019

The latest slaughter data suggests producers are retaining more cows, signaling further herd expansion. "That also doesn't bode well for dairy prices in the first and second quarter of next year," Bozic says.

The interim indicator of milk abundance is the spot price basis published and reviewed by the Dairy Market News, which covers the weekly supply, demand and price situation on a regional, national and international basis for milk, butter, cheese and dry and fluid products.

"Last year at this time, the Upper Midwest Spot Milk Basis was a negative $2. That is typical for this time of year. We are now at almost negative $6, so that's the spot price versus the nearby Class III futures price. That suggests that milk is abundant and that there will be continued pressure on dairy prices."

Another market influencer in 2021, is the joint venture between Glandia and DFA, the new cheese plant in St. Johns, Michigan.

"It just started taking milk," Bozic says. "The milk intake will grow about 1 million pounds per month until it reaches its intended capacity of 8 million pounds per month next summer. That plant is going to take about 20% of Michigan's milk supply and will produce about 800 pounds of block cheddar cheese daily. But some analysts suggest that by next summer, overall U.S. cheese production, including this new plant in Michigan, and expansions in Minnesota and elsewhere, will grow between 5% and 7% year-over-year.

"Typical domestic demand growth is about 1% to 2% per year. So, unless we export almost all of this increase, we are going to have issues domestically with the amount of cheese and that's going to bring the protein and cheese prices down, therefore making all milk prices depressed as well."

What to do?

So, what can producers do to brace themselves for the downside risks on the horizon? "Whether they have 50 cows or 5,000 cows, they can sign up for Dairy Margin Coverage, the two-tiered program, particularly the first tier. The first 5 million pounds is very favorable to producers," Bozic says. "Had this program been in existence over the last 10 years where 15 cents of premium contributed to the program, average payout per hundredweight would have been $1.38. For every $1 paid in premium over the last 10 years, producers would have collected $9 in gross indemnities before premiums."

For more information about signups, click here. To help producers determine the level of coverage under various conditions, a DMC decision tool is also available.