Dairy Margin

At its base, milk pricing in the U.S. is complicated (How Milk Is Priced in Federal Milk Marketing Orders: A Primer). And the variations in milk checks from farm-to-farm (even neighbors), month-to-month, and cooperative-to-cooperative, and from cooperative to proprietary handler take the pricing complexities to another level. Prices paid to dairy farmers depend upon where the farm is located, where the milk was delivered and pooled, the fat and protein content in the milk and the cooperative- and handler-specific premiums and assessments. Put simply, every dairy farmer in the U.S. likely receives a different price per hundredweight for their milk.

Developing and implementing a farm safety net program outside of crop insurance, i.e., Margin Protection Program and now Dairy Margin Coverage, was complicated by the fact that not only did every dairy farmer have a different price for their milk, but every dairy farmer also likely had different costs of production. Thus, a nationwide approach was taken to deliver targeted income support during times of low milk prices, high livestock feed costs or a combination of the two.

To implement DMC, USDA uses the National Agricultural Statistics Service’s monthly U.S. average all-milk price, i.e., the gross milk price farmers received. The challenge here is USDA publishes another national average milk price called the mailbox milk price, i.e., the net milk price on the check that arrives in the mailbox. The net mailbox milk price includes hauling fees, other authorized deductions and price re-blending due to balancing costs or loads of milk sold at distressed prices, among other items. Historically, these two national average milk prices followed one another very closely.

In recent years, however, these two price series have diverged, and in 2020, a year roiled by COVID-19 demand disruptions, negative producer price differentials and mass depooling (More Negative PPDs and De-Pooling Reignite Federal Milk Marketing Order Debate), the spread between the two milk prices was record-large. For example, in October and November, the USDA all-milk price was more than $2 per hundredweight higher than the national average mailbox milk price. One explanation is the higher-valued milk was not in the pool, and thus was not included in the mailbox milk price calculation.