An Overview of the Dairy Margin Coverage Program
By Colby Ferguson, Director of Government Relations
As most of you know, Congress passed the 2018 Farm Bill at the end of last year. The updated Farm Bill includes a new and improved dairy assistance program – the Dairy Margin Coverage program (DMC). The DMC replaces the Dairy Margin Protection Program that failed to provide much-needed assistance with severely depressed milk prices.
Why should farmers believe that the DMC program will be better than the previous program?
I’ve had several dairy farmers pose this question to me, and it’s a valid concern. I posed the same question to the Farm Service Agency (FSA) and Maryland Department of Agriculture staff, and I’m very happy to report that not only is this program better than the last but the proof is also easy to see. It’s important that our dairy farmers understand what the DMC is and why it’s a no-brainer to sign up as soon as possible. Sign-ups for the program close September 20th, so be sure to get to your local FSA office soon!
What is the Dairy Margin Coverage program?
The DMC is federal dairy assistance program administered through USDA’s Farm Service Agency. The funding and authorization of this program was through the adoption of the Agriculture Improvement Act of 2018 – the 2018 Farm Bill.
The DMC is designed to offer dairy producers catastrophic coverage at no cost, other than an administration fee of $100. There are several exemptions associated with the administrative fee – limited resource, beginning farmers, veteran farmers, and socially-disadvantaged farmers may qualify for the exemption. Be sure to talk with your local FSA office to determine if you qualify for any of these exemptions.
The program allows you to increase the margin coverage above the $4 catastrophic margin. These margin increases are offered in $.50/cwt increments. Producers can elect into Tier I (up to the first 5 million pounds of milk produced annually) and Tier II (remaining milk over the first 5 million pounds produced annually) coverage, which is authorized for 5 years of coverage. You have the option to sign up yearly or do a one-time five-year sign up and receive a 25% discount on any buy-up premiums selected. The Tier I and II catastrophic coverage is $4 and is provided for free. There is an option to buy up to $9.50 margins under Tier I for $0.15/cwt of milk produced. However, the Tier II coverage only goes up to $8 margins and the premium costs are significantly higher.
The last little note is that the farmer is allowed to cover between 5% and 95% of the milk they produce annually. So even though Tier I includes up to the first 5 million pounds of milk produced annually, the program only allows the farmer to cover up to 95% of that amount. In all, the program was subsidized to assist small dairy farms while still providing value to larger dairies.
The program pays out on a monthly basis, but the farmer’s premium cost is only once per year. Even though the sign-up period opened in June and runs through September, producers that sign up will receive back payments through January 2019. There are also several exemptions associated with the administrative fee. Limited resource, beginning farmers, veteran farmers, and socially-disadvantaged farmers may qualify for the exemption. Be sure to talk with your local FSA office to determine if you qualify for any of these exemptions.
How is the dairy margin calculated?
On a monthly basis, the FSA office will calculate the actual dairy margin by taking the All-Milk Price and subtracting the Calculated Average Feed Cost. This monthly dairy margin will then be compared to your purchased margin amount. If the actual monthly margin is below the coverage level you signed up for, you will receive a check for the difference. If the actual dairy margin is higher than the coverage level, no payment will be made for that month.
Example: You buy up to $9.50/cwt for the first 5 million pounds of milk produced annually and the actual margin for the month is $8/cwt. Under the DMC program, you would be paid $1.50/cwt for covered milk that month.
Why is it a no-brainer for a Maryland dairy farmer to sign up this year?
During the 2019 Legislative Session, Governor Hogan allocated $1.5 million dollars in the budget to be used to pay the $0.15/cwt premium cost for every qualifying Maryland dairy farmer. This means your Tier I milk would be covered under the maximum margin level ($9.50/cwt) for the first year of the program. So, every dairy farmer in Maryland that qualifies for the DMC (meaning you commercially ship milk) can get the maximum coverage of up to 5 million pounds of milk for FREE for one year.
In addition, the dairy margins through April 2019 are already available, which means you can calculate how much you will be paid for the first four months of the year.
Example: You cover the first 5 million pounds of milk at a 95% coverage level, which is covered entirely under the Tier I premium level. You sign up for the highest margin level ($9.50) at no additional cost because of the state budget allocation from Governor Hogan.
The actual margin levels for the first four months are as follows: January = $7.99; February = $8.22; March = $8.85; April = $8.96. Here’s the January payment calculation:
Step 1: $9.50 – $7.99 = $1.51/cwt
Step 2: 5,000,000 lbs of milk x 95% coverage = 4,750,000 lbs
Step 3: 4,750,000 lbs/100 lbs = 47,500 cwt.
Step 4: 47,500/12 months = 3,958 cwt for the month
Step 5: 3,958 cwt. x $1.51/cwt. = $5,976.58 payment for January
If you follow the same steps for February, March, and April using the actual margin levels above, you will receive a total payment of $15,752.84 – just for the first 4 months of 2019!
Should I sign up for the one-time 5-year program or just sign up annually?
This is something each farmer will have to decide. A 25% premium discount is being offered if you sign up for the next 5 years. Maximum Tier I coverage is already free for the first year. With the 25% discount, it would cost you $0.1125/cwt to receive maximum Tier I coverage for years two through five.
Example: If you elected to sign up each year for the maximum Tier I coverage level, you would pay $7,125 per year for years 2 through 5. This equates to a total premium cost of $28,500.
If you were to sign up for the full 5 years in advance, it would cost $5,343.75 per year for years 2 through 5. This is a total premium cost of $21,375.
You already know you are getting paid $15,752.84 just for the first 4 months of the 5-year program, so doing the one-time sign up might not be as expensive as it looks at first!
I know it’s only July, but September 20th will be here before you know it. As a fellow Farm Bureau member, I highly encourage you to head to your local FSA office and sign up before time runs out. With today’s milk prices, you can’t afford to leave money on the table!