Peterson: DMC Should Be Modified To Protect Large Dairies, Too

02:48PM Nov 11, 2019
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The Dairy Margin Coverage program (DMC), that went into effect this year in place of the former Margin Protection Program, has paid farmers more than $300,000,000 in 2019. While the dairy industry as a whole is happy with the program, House Ag Committee Chairman Collin Peterson (D-Minn.) says some changes need to be made to make the program more beneficial to farms of all sizes. 

Even with milk production coming in at the highest growth of the year in September (up 1.27% year over year), the U.S. is only averaging a 0.19% growth rate in 2019. That is not enough milk to keep up with the standard gains in domestic consumption.

Markets do that for a couple of months in a row, and the buyers start to eat through their inventories, hoping it’s just a blip on the radar for milk production and that prices will come back down. This happens for nine months in a row (as we have this year) and, all of a sudden, they have chewed through personal inventories and have to start going back to the market to buy cheese, therefore driving the prices up. Now the supply-demand function is starting to move, and any small hiccup in the supply chain (whether it’s continued lower milk production or a hiccup at the plant level causing a shortage of cheese) sees us knocking on the door of prices we haven’t seen since 2014.

How sustainable are these prices? We again look at the supply-demand picture. We know supply has been steady to lower all year, until this last September report. The September cold storage report showed a drawdown in cheese inventories that was smaller than average for the month. Next, we look at the rest of the world. The U.S. has, by far, the most expensive cheese. However, so far it hasn’t mattered because domestic demand has outpaced supply. Now we still have a little time left in peak demand season with the holidays right around the corner, but the question remains: When will we need exports?

Only time will tell exactly how long good prices can last, but we can do our best to forecast by carefully watching the key indicators. Continue to keep an eye on milk production and dairy cow slaughter. Exports are also critical. If we can find a way to get new international sales at these prices, then we can hang out for a while at this profitable area. Throughout all of this, keep this in mind: Yes, low prices cure low prices, but the same is true the other way around. High prices cure high prices. Additionally, don’t be afraid to consult with your broker about how to manage your price risk.