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A First for Dairy Margin Coverage

Geoff Vanden Heuvel

Director of Regulatory and Economic Affairs

The Dairy Margin Coverage (DMC) Program is the basic safety net USDA provides for America’s dairy farmers. It is structured to provide payments to enrolled farmers when the margin between milk income and feed costs become compressed.

A major component of how the program is structured is that the best margin coverage (which provides payments when the margin is less than $9.50 per cwt.) is available only on the first 5 million pounds of milk a dairy facility produces per year. That amount fully covers the milk from about 200 cows. Obviously, here in California where the average dairy is well over 1,500 cows, this program falls far short.

In the last Farm Bill in 2018, Congress did make a modest attempt to provide some coverage to the higher volumes of milk by retooling the premium structure for milk volumes above 5 million pounds. Margin coverage at $4 per cwt. has always been free. But in 2018, Congress provided that producers could sign up for $5 margin coverage for a premium of ½ cent per cwt. or $50 per 1 million pounds of coverage.

Until May of 2023 the margin had never been below $5. But in May the margin was $4.83 per cwt., which will provide a payment of 17 cents per cwt. for all the enrolled annual pounds divided by twelve months, less a required 5.7% sequester. What that means is a payment of $1,603 for every million pounds of covered production. This is nowhere near enough to cover the massive losses occurring right now, but it’s not nothing either.

It is likely that margins will be below $5 for at least a few months unfortunately. What this points out is that even though it seemed very unlikely that margins would get this low, there is no real floor in the dairy industry market. Having a risk management strategy is an important function that each dairy should take seriously and there are a number of tools that can be utilized. The DMC didn’t seem like it would ever pay at these low margin levels, but here we are.

More information about the Dairy Margin Program, including a producer decision tool and enrollment information, is available here.

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