2022 Dairy Margin Coverage decision is just around the corner

Dr. Scott Brown, director of strategic partnerships for the University of Missouri’s College of Agriculture, Food and Natural Resources

Dairy farmers who did not opt in for all five years of Dairy Margin Coverage (DMC) back when the 2018 farm bill was passed soon will have to decide about their 2022 participation level. This choice can be difficult as farmers have to weigh the premium cost relative to the level of risk protection available and their anticipation of milk and feed markets in the year ahead.

Many will look back at how the program has operated in the past when making their decision for the coming year. USDA’s Farm Service Agency (FSA) provides weekly updates on the money distributed under DMC. Through the first seven months of 2021, FSA reported that the program has sent $544 million to farmers. That number will undoubtedly increase as additional payments will be made given current DMC margins.

Also, USDA has announced it will be making another change in the formula to reflect the cost of high-quality alfalfa more accurately. USDA estimates that will result in another $100 million in DMC payments for 2021. The Congressional Budget Office’s July 2021 baseline estimates that DMC outlays for fiscal year 2022 will total $1.8 billion, and FY2021 will total $850 million.

These current and projected DMC outlays should remind dairy farmers that it is worth spending time determining their 2022 participation level.

The graph of the monthly DMC margin shows the decline that began in late 2020 and has continued into 2021. Higher feed costs have been largely responsible for the downturn of the DMC margin as feed costs have jumped by around $4 per hundredweight since the middle of 2020.

Although current and past information regarding the DMC program is one tool for making participation decisions, considering current projections for 2022 milk and feed prices is also beneficial. USDA’s current 2022 all milk price estimate is $18.40 per hundredweight, a $0.35 per hundredweight increase over the 2021 estimate. This increase in the 2022 all milk price depends on stronger butter and nonfat dry milk prices. Domestic and international demand growth for dairy products will be needed in 2022 for stronger all milk prices to become a reality.

The outlook for feed costs has been more volatile as dry weather in some parts of the U.S. has reduced crop yields for the crop currently being harvested. USDA’s current estimate for the 2021/22 season-average corn price is $5.45 per bushel, up $1 per bushel over the 2020/21 season-average price. Corn is the largest feed cost component of the DMC margin, and the increase projected for the 2021/22 crop year, if realized, keeps pressure on the DMC margin. USDA reduced its 2021/22 corn price in the last monthly report, and corn futures prices have moved lower over the past couple of months.

In summarizing the 2022 outlook for the DMC margin, it appears that milk prices will remain near levels experienced in 2021 if dairy demand remains stable. However, feed costs may continue to run high in 2022. Feed costs could moderate in 2022 if a big South American crop harvest materializes and the 2022 U.S. growing season is above average.

There is more risk and increased volatility ahead for dairy farmers’ profitability in 2022. Although the level of support provided by DMC in 2021 may not repeat in 2022 if the DMC margin recovers, there is enough uncertainty about 2022 that DMC may offer a good hedge against the added uncertainty. The bottom line is that farmers should take the time needed to determine the level of participation in DMC that best fits their business in 2022.