Ripple effects of the COVID-19 pandemic continue to impact dairy farmers. In our last dairy article we touched upon the network of pandemic-related market conditions that triggered Dairy Margin Coverage payments for the seventh consecutive month. Unsurprisingly, shrunken margins persist and have, yet again, triggered DMC payments for the eighth, ninth and 10th consecutive months through this past September.
September’s DMC margin was $6.93 per hundredweight, $1.68 above August’s record-low of $5.25, triggering payments for those with selected coverage levels of $7 or higher. The modest decline in corn and soybean meal prices over the past few months contributed to the lowest factored average feed cost ($11.50) since May. That said, corn and soybean meal costs remain above average, partially linked to the widespread supply chain shortfalls ranging from labor shortages and increased input costs to delayed and costly transportation hurdles. Alfalfa prices have continued on an upward trend. Eight of the top 10 hay-producing states remain affected by widespread severe drought with farmers reporting reduced crop yields ranging from 26% (New Mexico) to 64% (Montana) lower than last year.
Additionally, the 25,000-head drop in milk cow numbers from August to September has not yet materialized into lower supply. In July, the Farm Service Agency originally expected to pay out $540 million in DMC payments for the 2021 program year. In their September report, however, the estimated DMC payments for disbursement jumped to $817 million, 151% of this estimate. Dairy Margin Coverage remains a widely used safety net by over 75% of dairy farmers across the nation.
On the Dairy Revenue Protection (DRP) side, indemnity payments are down from 2020 while program participation is up. In 2020, 15,022 insurance policies were sold with a combined 16,873 endorsements earning premiums. Payments totaled $465 million as 5,550, or 33%, of those endorsements were indemnified. As of Nov. 22, in 2021, 18,773 DRP policies were sold, with a combined 21,046 endorsements earning premiums. This is a 3,751 jump in sold policies from 2020, with the largest jumps in New York (+1,053), Pennsylvania (+642) and California (+445). With 3,980, or 19%, of 2021 endorsements indemnified, $95 million in payments have been made. Figures 3 and 4 display the percent of endorsements indemnified in each state for 2020 and 2021, respectively. Though milk prices have experienced volatility throughout 2021, it has not compared to the peaks and trenches of 2020, which resulted in more extreme payouts. Notably, average Base Class I prices have remained on a marginal upward trend, starting at $15.14/cwt in January 2021 and most recently $19.17/cwt for December, reducing the likelihood of DRP payouts.
Speaking of Class I prices, farmers recovering from lopsided Class I revenue have tempered optimism about USDA’s new Pandemic Market Volatility Assistance Program (PMVAP) and its ability to fill gaps left by de-pooling. Since the 2018 farm bill, the price for Class I milk, i.e., milk used to produce beverage milk products, has been calculated using the simple average of advanced Class III (cheese) and Class IV (milk powders) skim milk prices plus 74 cents. In years prior, the formula was the higher of advanced Class III and Class IV skim milk prices. As illustrated in Figures 5 and 6, during 2020, this Class I formula change, combined with pandemic-induced price volatility, resulted in massive price differences from what would have occurred under the old formula. Correspondingly, the formula change resulted in $736 million less in the federal order pool in 2020, resulting in widespread negative producer price differentials.
To address these perceived losses, on Aug. 19, USDA announced PMVAP, which is expected to provide $350 million in pandemic assistance payments to dairy farmers who received lower value for their milk (primarily Class I suppliers) due to market abnormalities (widespread de-pooling) caused by the pandemic. Program payments will “reimburse qualified dairy farmers for 80% of the revenue difference per month based on an annual production of up to 5 million pounds of milk marketed and on fluid milk sales from July through December 2020.” USDA is currently working with individual processors to come up with a unique payment plan for impacted producers. Eligible handlers are said to be any handler that paid producers that had pooled milk during 2020. The USDA has chosen to funnel payments through processors and to producers to reduce administrative burdens on the USDA and take advantage of prior payment processes already utilized by the handler. The exact method handlers will use to disseminate payments will depend on the particular methods used to pool, blend and pay farmers during the pandemic. Given hesitation over transparency, USDA has assured a full auditing process will be in place to ensure that farmers receive their payments and that handlers did not retain any of the funds. PMVAP has garnered initial criticism from farmers over its 5-million-pound limitation and adjusted gross income limitations. Others have praised it for its educational requirement that includes funding for farmer training related to better understanding the Federal Order system, risk management options, conservation and other relevant dairy topics. Nonetheless, PMVAP is an attempt to lift the burden of pandemic-linked market disparities.
Takeaway
Risk management programs remain a vital safety net for dairy farmers still reeling from pandemic-induced market conditions. Higher than average feed prices linked to widespread supply chain challenges will continue to pressure milk margins, making 2022 Dairy Margin Coverage an advisable purchase for most farmers entering the new year. Regardless of fewer indemnity payouts in 2021, uncertainty surrounding milk prices will also keep Dairy Revenue Protection relevant to farmers looking to protect against unexpected price drops. Additionally, the Pandemic Market Volatility Assistance Program, although outside the scope of any risk management program, will attempt to fill gaps left by de-pooling and negative producer price differentials in 2020. Moving forward, farmers have kept risk management options top of mind, with special interest on opportunities that may protect against COVID-19-like events. Helping to educate farmers on the options available to their unique operation to protect from unexpected revenue drops and heightened input expenses will contribute to a more stable farm economy.
