OMAHA (DTN) -- Pointing to looming signs of demand weakness for dairy products, coupled with higher milk production, a University of Minnesota agricultural economics professor urged dairy farmers on Friday to enroll in USDA's Dairy Margin Coverage (DMC) program for 2021.
With the enrollment deadline a week away, USDA officials are asking dairy farmers to sign up for DMC as enrollment for 2021 so far remains low.
Marin Bozic, speaking to reporters in an event set up by USDA's Farm Service Agency, said dairy farmers are leaving money on the table if they are not signed up for DMC in 2021. He also stressed that bankers should be encouraging their dairy clients to enroll.
"It should be a cornerstone of their risk-management strategy for 2021," Bozic said.
Despite multiple vaccines expected to start boosting immune systems of people in the coming months, Bozic emphasized it could be next summer before the general population is vaccinated. In the near term, the high rates of infections, hospitalizations and deaths nationally effectively also hit dairy demand. Dairy sales may need to rely on some type of aid program that continues to provide more dairy products to consumers, such as a continuation of USDA's Farmers to Families Box program. So far, Bozic said the incoming Biden administration has not signaled a willingness to continue that program.
On the other hand, milk production grew in September and October by at least 2.3% from 2019 production. Nationally, dairy growth over 2% like that "is a red flag and may induce or depress prices over the next six to nine months," Bozic said. Several states are seeing high dairy growth at the moment. Lower dairy cattle slaughter also signals herd expansion, he said. A new cheese plant in Michigan and some increased processing in states such as Minnesota also will lead to higher production.
"That also does not bode well for dairy prices in the first or second quarter next year," Bozic said, adding prices would be depressed if exports do not rise.
All that said, DMC enrollment at the end of November was only about 32% of eligible producers nationally. Wisconsin leads the nation in farmers signed up for the program, but several major dairy states still show under 50% have signed up. Last year, 13,496 producers signed up, but as of now only 7,846 farmers had enrolled for 2021. In 2019, USDA shows 23,419 dairy farmers participated in DMC.
Darin Von Ruden, president of the Wisconsin Farmers Union, said at least some farmers may be upset over USDA's management of DMC after the department didn't reopen enrollment last spring when prices crashed.
"That's probably the really only thing I have heard other than right now the futures market is looking decent so farmers don't see how it's going to be beneficial to sign up for the program," Von Ruden said.
There's typically also a little bit of procrastination that could drive sign up to soar in the last week of the sign-up period, Von Ruden said.
The DMC program offers protection to dairy producers when the difference between the all-milk price and the average feed cost (the margin) falls below a certain dollar amount selected by the producer. Farmers pay a minimum $100 administration fee to participate in the program then pay a premium per hundredweight (cwt) of production based on a coverage level, ranging from $4.50 to $9.50, on the first 5 million pounds. A second tier of premium coverage will cover production above 5 million pounds.
DMC would help dairy farmers brace themselves for a downturn in the market, especially for the first 5 million pounds of production a farmer enrolls.
DMC is set up to provide what Bozic described as a "generous premium structure versus return." At that first 5-million-pound threshold, Bozic said an analysis showed over the past decade the DMC would have paid out $9 in indemnities for every $1 a farmer paid in premium.
Calculations by agricultural economists show DMC would basically offer a floor price protection for producers just below $18 per cwt throughout most of 2021. "That is an extremely effective floor price for many producers in the 150- to 250-cow category," he said.
DMC enrollment has dropped each year. In 2019, 84% of eligible dairy farms were enrolled in the program. When the program began, at least some farmers signed up for coverage through 2023 to receive a 25% premium discount. In 2019, DMC paid out $313.8 million, or an average of about $13,400 per operation.
About 51% of eligible farmers signed up in 2020, enrolling about 122.5 million pounds of production. The program has paid out $199.6 million in payments through Nov. 23, or about $14,878 per operation.
Bozic stressed that USDA, Extension staff, processors, fellow dairy producers and news media should be encouraging farmers and their bankers to get operations signed up by the Dec. 11 deadline.
"Let's not be ambivalent about this. The message needs to be very clear," Bozic said.
Richard Fordyce, USDA's Farm Service Agency administrator, said USDA has not looked at extending the enrollment deadline.
Earlier this week, an analysis by the American Farm Bureau Federation also pointed out that the lack of signup for DMC "is somewhat perplexing to observers given the potential of payments exceeding premiums seems relatively likely."
A possible reason for low interest in DMC is the aid provided to dairy farmers under the Coronavirus Food Aid Program (CFAP 1 and 2). The two programs combined had paid dairy farmers nationally $2.77 billion in 2020 while DMC payout has been under $200 million.
For the moment, Congress has not authorized any new aid packages for agriculture, though negotiations continue over just how large an aid package Congress could pass before the end of the year. That would then likely require the incoming Biden administration to either build on the CFAP aid or create a new plan. Fordyce cautioned dairy farmers against wagering that they would be in line for further rounds of direct aid.
"You know, I can't predict what the next administration is going to do for any kind of support related to the pandemic, or maybe other things may happen that we're not even aware of that this point," Fordyce said. "And so I guess if I were counseling dairy operations, I would say that we don't know what's coming next."
The enrollment deadlines for both DMC and CFAP 2 is Dec. 11. Farmers may have to work with their local FSA office online, by phone or schedule an appointment, depending on how COVID-19 is impacting their area. They can also find more information out about the programs and enrollment at www.farmers.gov.
Chris Clayton can be reached at Chris.Clayton@dtn.com
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