A new safety net for dairy farmers

The Dairy Margin Coverage program created by the new farm bill will serve as a safety net for dairy producers. It tweaks the previous Market Protection Program to make the MPP more affordable for many dairy producers. Similar to MPP, the DMC program is a margin-based program, which is calculated on the income over feed cost margins on a monthly basis.

DMC sign-ups will begin on June 17. DMC payments are scheduled to begin after July 8, and payments to eligible dairy producers will be made retroactively back to January 1, 2019.

The program is voluntary and requires dairy producers to choose production and price coverage levels at various premium rates. There were some fairly significant enhancements in the DMC program in providing a safety-net program for dairy producers. Improvements primarily affect smaller herds under 250 cows, but also other some flexibility to larger operations.

Following are some of the highlights:

  • Dairy producers now have a coverage level choice up to 95 percent of production history. (MPP maximum coverage level was 90 percent of production history.)
  • It offers three new Tier 1 price coverage levels at $8.50/cwt., $9.00/cwt., and $9.50/cwt. (MPP top price level was $8.00/cwt.)
  • Tier 1 coverage goes up to 5 million pounds of production (approx. 200-250 cows). (MPP Tier 1 maximum was 4 million pounds.)
  • It provides more flexibility, allowing larger dairy farms to select different coverage levels for Tier 1 and Tier 2 coverage if they select the $8.50/cwt. coverage or higher for their Tier 1 coverage. They can take advantage of the improved DMC coverage on the first 5 million pounds and opt for lower coverage levels on the balance of the production. (MPP required that all coverage be at the same price level, which is still required under DMC when the Tier 1 coverage level selected is $8.00/cwt. or lower.)
  • Provides a 25 percent premium discount for dairy producers that make a one-time 5-year enrollment into the DMC program.
  • DMC premiums are more affordable than with the original MPP. Producers can purchase the $9.50/cwt. coverage for a premium of $.15/cwt., which is reduced to $.1125/cwt. when utilizing the premium discount from the previous bullet point. The premium for $8.00/cwt. coverage is $.10/cwt., or $.075/cwt. with the premium discount. (The $8.00/cwt. coverage under MPP had a premium of $.142/cwt.) Larger dairies that opt for Tier 2 DMC coverage can receive $5.00/cwt. coverage for $.005/cwt., or $4.00/cwt. coverage for free.
  • It allows for 75 percent of the MPP premiums paid from 2014-2017 to be applied as a premium credit for DMC enrollment. Producers also have the option to take 50 percent of the MPP premium payment as a one-time cash payment, as an alternative to the DMC premium credit.
  • Dairy producers may enroll in both the DMC program and either the Livestock Gross Margin or Dairy Revenue Protection program, which are RMA crop insurance type programs. (With MPP, producers could choose MPP or LGM coverage, but not both.)
  • Dairy producers that were in the LGM program in 2018 (thus restricted from previous MPP coverage), can now retroactively receive eligible 2018 MPP payments.

Impacts of the higher Tier 1 price coverage

Under MPP, many dairy producers selected Tier 1 coverage at either the $6.50 or $8.00 per hundredweight coverage levels for 2015 to 2018. Based on USDA data, MPP payments only occurred in 4 percent of the months during that time period at the $6.50/cwt., and in 41 percent of the months at the $8.00/cwt. level. The DMC program now offers higher price coverage level options of $8.50, $9.00, and $9.50 per hundredweight. Had the DMC program been in place from 2015 to 2018, DMC payments would have occurred:

  • in 52 percent of the months at $8.50/cwt.
  • in 63 percent of the months at $9.00/cwt.
  • in 80 percent of the months at $9.50/cwt.

The maximum DMC coverage price is $9.50 per hundredweight, which is 117 percent above average MPP/DMC margin over the past ten years of $8.11 per hundredweight. The average MPP/DMC margin over the past five years has been $9.51 per hundredweight, which correlates to the new maximum DMC price coverage level. It should be noted that the 5-year average was more impacted by the record high margin level in 2014.

Past price margins are not necessarily a predictor of future DMC program payments; however, based on current trends in the margins, the $9.50 per hundredweight level should provide a considerably improved safety net for dairy producers.

For additional information email Kent Thiesse, Farm Management Analyst and Senior Vice President, MinnStar Bank, Lake Crystal at kent.thiesse@minnstarbank.com.  
To subscribe to BankWise for weekly Ag Lending News updates email Kristi Ploeger or call 651-789-3997. 

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