Risk Management
Dairy prices are by nature volatile due to seasonal production in some regions and milk’s perishability. Adding to these challenges, dairy farmers depend on unpredictable weather, live animals and changing regulations. Financial risk management programs are critical to the economic viability of U.S. dairy farms.
The Dairy Margin Coverage (DMC) program, created in the 2018 Farm Bill at the urging of NMPF, offers financial certainty, helps with planning and quickly responds to shifts in milk and feed prices. DMC is designed to ensure that dairy farmers can protect themselves against financial catastrophe and market fluctuations. Managed by USDA’s Farm Service Agency, the DMC program is an essential part of risk management for dairy farmers, particularly for small and mid-sized operations.
Other farm-level risk management tools are administered by the federal government but sold by private insurers. These include USDA Risk Management Agency’s Dairy Revenue Protection (DRP) and Livestock Gross Margin—Dairy (LGM-Dairy). NMPF made DRP and LGM-Dairy much more workable for all farmers in the 2018 Farm Bill by removing enrollment restrictions that kept many producers from gaining adequate access to them. Each of these programs provide options for dairy farmers to protect their businesses when dairy margins fall.
Our Position
NMPF works to ensure the timely and efficient operation of the DMC program and other risk management programs authorized by Congress, including DRP and LGM-Dairy. NMPF supports enhancements of these programs to make them accessible, viable and effective for dairy producers of all sizes and in all geographies.
Key Points
- Developed as part of the 2018 Farm Bill, DMC offers effective margin protection for small and mid-sized farms and affordable catastrophic coverage for large farms. DMC offers protection to dairy producers when the difference between the all-milk price and the average feed price (the margin) falls below a certain dollar amount selected by the producer.
- The DMC program now offers additional benefits to enrolled farmers. A recalculated feed-cost formula that fully factors in the cost of high-quality alfalfa hay will increase program payments, a feature that will last through 2023. Meanwhile, a new Supplemental Dairy Margin Coverage program will enable some producers enrolled in DMC to receive additional payments that reflects increases in their production since 2014.
- DMC can be combined with other USDA risk management programs for dairy, including DRP and LGM-Dairy. Producers have the option to stack these programs for production not covered through DMC.
- DRP is designed to insure against unexpected declines in the quarterly revenue from milk sales relative to a guaranteed coverage level. The expected revenue is based on futures prices for milk and dairy commodities, and the amount of covered milk production elected by the dairy producer.
- LGM-Dairy provides protection when feed costs rise, or milk prices drop and can be tailored to any size farm. Prices for LGM-Dairy are based on simple averages of CME Group futures contract daily settlement prices and are not based on market prices.
