Jason Hartschuh, Assistant Professor, OSU Extension Field Specialist, Dairy Management and Precision Livestock, Ohio State University
The dairy industry has a history of volatility in profits coming from both income (milk price and the beef market) and expenses (feed prices). Using multiple strategies to manage these risks in 2025 can help protect your operation from volatility. Dairy Margin Coverage (DMC) through the U.S. Department of Agriculture (USDA) is one of these tools that allows producers to manage both milk price risk and feed cost risk together. This program allows producers to protect their operations from market fluctuations. Over the past 15 years if DMC was available as it is today, the first 5 million pounds of milk production history covered with a $9.50/cwt margin would have had a positive net benefit (Indemnity payments minus premiums) 13 of the 15 years. Enrollment for DMC begins January 29, 2025 through March 31, 2025 at your local USDA Farm Service Agency (FSA) office.
Current DMC outlook
The current market projections using the DMC feed cost calculation can be found at: https://dmc.dairymarkets.org/. This tool can be used to evaluate the current market projects for feed cost and milk price using DMC calculations. The current All Milk Price forecast by month ranges from $22.63 to 23.86/cwt with an average for the year of $23.16/cwt. The feed cost for the year using the DMC calculation ranges from $9.45 to 9.79/cwt with an average of $9.60/cwt. These milk price and feed cost projections lead to a DMC margin range of $13.09 to 14.19/cwt, with a year average of $13.56/cwt. This range is well above the maximum DMC protectable margin of $9.50, but either a downturn in milk price or an increase in feed costs could lead to the DMC program triggering a payout. A lot can happen in the world markets over a year, potentially increasing feed costs through domestic or internal weather challenges that lower corn and soybean production. While domestic demand for dairy products has shown great resilience, milk prices could see challenges from international markets or increases in domestic cow numbers and production. As a risk management tool, DMC costs $0.15/cwt for $9.50/cwt margin coverage, which is significantly less than most other risk management tools for both milk price and feed costs.
Dairy Margin Coverage Highlights
- Provides protection when milk prices and feed costs create tight margins
- A $9.50 margin for Tier 1 coverage only costs $0.15/cwt
- Provides an affordable safety net against unpredictable market fluctuations
- Coverage for extremely tight margins of $4.00/cwt is available for only an administrative fee of $100.
- Enrollment is necessary, even if enrolled in the past and coverage election is unchanged
- Enroll through your local USDA FSA office
- Enrollment is January 29, 2025 through March 31, 2025
Other Risk Management Strategies
Dairy Margin Coverage is the first step for managing risk, but many other opportunities are available. Through the USDA Risk Management Agency (RMA), the same group that provides crop insurance is the Dairy Revenue Protection (DRP) program, which can be used to set a floor under your milk price. This program can protect from a decline in milk price based on available milk futures and component futures. The protectable price available is 95% of the futures market price or a producer can choose a lower protection amount of the futures price. This program has a higher cost per hundredweight than DMC, with the Quarter 2 2025 protection starting at about $0.26/cwt after subsidies for Class IV coverage and increasing if competent coverage is added or later quarters are protected. The price and availability of DRP contracts vary daily based on futures market trading. With higher milk prices and low feed costs, this program may be a tool to ensure current milk price projects are a reality on your farm. One of the best strategies when using this program is to do contracts when the protected price minus the contract cost is above your cost of production, allowing you to set a profitable milk price floor. Alternatively, a producer can set a higher milk price floor under their milk price using a put option directly from the Board of Trade, but this is more costly since it is unsubsidized and at a milk price closer to where the futures are actually trading.
With lower feed cost projections, risk management strategies should also be considered for your purchased feeds. The most common strategy is a direct forward contract of feeds with your supplier with a set cost. Some feed suppliers also offer alternative programs that only set a ceiling on your feed cost, allowing the producer to take advantage of price declines. These options typically have a higher ceiling than the set price forward contract, but it allows you to take advantage of feed price declines if they occur. For some feeds, a call option can also be used from the Board of Trade to set a ceiling on your feed cost. The other feed cost risk management program available through RMA is the Livestock Gross Margin-Dairy Program which can be used to protect the margin between Class III milk prices and corn and soybean meal prices.
As you consider risk management strategies, keep in mind that depending on your Federal order, your milk price is a combination of all four classes of milk, which are based on both Class III and IV milk prices that have been moving independently of each other. If you are in Ohio and your milk is pooled in Federal Order (FMMO) 33, approximately a third of your milk check comes from Class III milk and a third from Class I with the remaining third coming from Class II or IV. Currently, Class I price is an average of Class III and IV plus $0.74/cwt, but with the Federal order reform starting in June of 2025, Class I milk prices will be higher than Class III or IV milk prices. For risk management, the time between the amount of your milk check and risk based on Class III or Class IV prices could change. However in FMMO 33, at least a third of your milk price will continue to be based on Class III milk price, and as long as Class IV remains higher than Class III, a significant percentage will be based on Class IV milk price. When managing risk using alternative programs beyond DMC, protecting your milk price with both Class III and IV risk protection strategies will be vital.