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Risk Management Tools: Dairy Margin Coverage 2021

Risk Management Tools: Dairy Margin Coverage 2021
By Andrew Sandeen
The enrollment period for 2021 Dairy Margin Coverage (DMC) opened on October 13 and will continue through December 11. Based on national milk and feed prices, the DMC program protects against low margins, paying when calculated margins fall below selected thresholds. The maximum level of margin coverage available is $9.50. The first tier of coverage, with premiums significantly lower than those in the second tier, is available for up to five million pounds of historical production. Payments are triggered when milk prices are low, when key dairy feed prices are high, or some combination of the two.
In Pennsylvania, participation in the DMC program declined significantly from 2019 to 2020. In 2019 there was a total 6.28 billion pounds of milk covered across 2314 dairies, but coverage dropped to just 2.98 billion pounds of milk across 906 dairies this year. So far, the estimated payout as of September 28 to those 906 PA dairies has been $11.17 million.
Of course, a lot has happened since the DMC sign-up deadline for 2020. Due to the circumstances with COVID-19 this year and evolving approaches to risk management since experiencing extreme market volatility, many are expecting that DMC participation will increase in 2021.
Though the DMC program does not ensure profitability of a dairy operation, it is a risk management tool with benefits that may far exceed the premium costs, as has been seen in both 2019 and 2020 (see figure above). Note that the figure accounts for the annual premium and fee as equal monthly costs.
To help reflect on the potential value of DMC for risk management, there is a new Dairy Margin Coverage Decision Tool available that is helpful for evaluating what the net benefit of DMC coverage would have been in past years and determining a milk price trigger specific to your operation.
How is your risk management plan looking for 2021? If DMC coverage makes sense, enrollment in this federally-subsidized program can be accomplished at your local USDA Farm Service Agency office.
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