Dairy producers across the country found themselves dealing with a slump in milk prices this year at the same time the cost of corn and hay continued to be high. For small to mid-size producers like Eric Fonda in upstate New York, USDA’s Dairy Margin Coverage program proved to be a godsend.
USDA expects DMC to make a record $1.27 billion in payments this year, far more than any other farm bill commodity program.
“DMC is a great program. The federal government has given me, you know, $8,000 or $10,000 a month because of the price of milk,” Fonda, a 43-year-old, third-generation farmer in St. Lawrence County, New York, near the Canadian border, said. Those payments roughly offset a decline in payments he’s seen from his cooperative this year.
DMC triggers payments every month when the margin between the average milk price and the average cost of feed falls below a coverage level selected by the producer. Producers can buy relatively affordable coverage on up to 5 million pounds of production, roughly 200 to 250 cows, to cover margins up to $9.50 per hundredweight. Coverage is available for higher levels of production, known as Tier 2, but producer participation is minimal because of the relatively high costs.
The average cost of milk fell from $23.10 a hundredweight in January to $17.40 in July, while the cost of feed only dropped from $15.16 to $13.88 over the same period. As a result, the average margin fell from $7.94 to just $3.52 by July, triggering ever-rising monthly payments.
Conditions have improved somewhat since then; milk prices have rebounded to $21.60 a hundredweight and feed costs eased, lifting the average margin to $9.44 by October. But this year's price slump also is reflected in a decline in cash receipts, from $59.2 billion in 2022 to $46.8 billion this year, in line with revenue levels in 2019 through 2021 when adjusted for inflation, according to USDA data.
USDA estimates the Agriculture Risk Coverage program, which provides payments to row crop producers when revenue falls below a five-year average, is paying farmers just $334 million this year. The Price Loss Coverage program, which triggers payments to row crop producers when the market prices fall below a reference price for each commodity, is paying just over $9 million.
Many in the dairy industry would like to see DMC expanded to higher levels of production. Even Fonda, who has fewer than 300 cows, says the program doesn’t fully cover his production.
While DMC payments have been “very generous” this year, “they're only helping relatively small operations,” said Peter Vitaliano, vice president for economic policy and market research for the National Milk Producers Federation.
Peter Vitaliano, NMPF“I'm hearing from all regions that dairy farmers, particularly in that somewhat larger [category of] 1,000 cows and above that, they are really not able to receive a lot of help from the Dairy Margin Coverage program,” he said. Dairy farms have been steadily consolidating and increasing output per cow. As of 2016, about 63% of U.S. milk production came from farms with more than 1,000 cows, up from just 34% in 2000, according to USDA’s Economic Research Service. Meanwhile, farms with fewer than 100 milk cows accounted for less than 4% of production in 2016, down from 14% in 2000.
Fonda said it only takes 200 to 220 cows to hit the 5-million-pound limit, and he argues the feed costs calculated by USDA for use in the formula don’t reflect regional differences.
Larger dairy farms also can use a pair of revenue insurance policies, Dairy Revenue Protection (DRP) and LGM-Dairy. DRP allows farms to insure against quarterly declines in milk revenue. LGM-Dairy insures against increases in feed costs or declines in milk prices.
DMC will be available to farmers again in 2024 under the year-long extension of the 2018 farm bill enacted last month, but USDA has yet to announce a signup for 2024 coverage. In 2021, Congress allowed producers to update the amount of production eligible for DMC, and that extension was continued in the farm bill extension.
The program is expected to continue triggering payments to producers into next year, but USDA's Farm Service Agency didn’t respond to a question from Agri-Pulse about its enrollment plans.
University of Wisconsin economists are forecasting the average margin to stay below $9.50 through the first few months of 2024.
Despite the increase in prices in recent months, Vitaliano doesn’t expect much increase in milk production next year.
“Production is going to be a bit subdued compared to what we’ve seen the last several years, and margins are going to be a little stronger than where we are right now,” he said.
In its latest dairy forecast, Rabobank pointed to “growing evidence that the bottom in the dairy commodity markets has passed and the general trend is for prices to move higher through 2024.”
Rabobank sees a “slow recovery in commodity prices back to long-term averages. However, current fundamentals provide the perfect ingredients for price volatility and a possible market whiplash. A high degree and uncertainty permeates all global markets, including dairy.”
Making any major changes to DMC in the next farm bill will be difficult given the struggle the House and Senate Ag committees are having in finding new funding for commodity programs.
However, Senate Agriculture Committee Chairwoman Debbie Stabenow, D-Mich., indicated in a recent interview with Agri-Pulse that it “needs some tweaks for small farmers.” She didn’t elaborate on what she would like to do, but indicated the cost could be covered by some additional funding she has identified with the help of Senate Majority Leader Chuck Schumer, D-N.Y.
House Agriculture Committee Chairman Glenn "GT" Thompson, R-Pa., has said he would like to increase the production limit on Tier 1 coverage.
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