The last Farm Bill dramatically changed the way the federal government supports the dairy industry. Gone are the old price support program and MILC payments. The dairy industry demanded a better support program than one based solely on milk prices, and the result was the Margin Protection Program for Dairy (MPP Dairy). MPP Dairy is not just a tool for dairy producers, it is “the tool” subsidized by the federal government to support the dairy industry. Non-subsidized risk management tools exist, but those will not be discussed here. So, how can dairymen make the most of the MPP Dairy program?
Dairymen need to understand that MPP Dairy is insurance, not a mere subsidy. Dairy producers are better off if the program does not pay out, as was true for price supports or MILC payments. Each of these programs kicks in when dairy markets are suffering.
One complaint of the old programs was how they used one milk price trigger across the U.S., and that trigger did not reflect the variability in financial conditions across dairy regions. More importantly, they didn’t account for cost of production, which also differed across the country. MPP Dairy was an improvement by using a type of income over feed cost (IOFC) trigger based on readily available feed ingredients and milk market data. While the MPP Dairy margin trigger is the same nationwide, dairymen may choose the appropriate “insurance” coverage for their individual farms by deciding on the margin threshold and the percent of milk production covered. The program gives producers more control, but that means producers now have to study the program. It is no longer automatic.
The MPP Dairy program has been available for one year. Most of the comments I have heard were not positive. The result was most dairymen selected the $4 catastrophic level for 2016. This is like reducing auto or health insurance because you didn’t hit a deer or get hospitalized last year. Very few people buy insurance for a financial return. They buy insurance for peace of mind when there is potential for something bad to happen. That’s risk management.
Dairymen saw conditions that led to <$8 margin levels from January through August, or 4 of the 6 program periods of 2015. Each month had a margin level calculated, and the range was a high of $8.33569 in January, to a low of $7.44659 in July. Correlate those margins to what your individual farm experienced. As you do, remember MPP Dairy uses an IOFC margin for all animals on your farm. When you do the calculations for your own farm, remember to add the feed costs of dry cows and heifers. How was July financially for you in 2015? What about January? Each month’s margins can be found online at http://www.fsa.usda.gov/ programs-and-services/Dairy-MPP/index. Contact your Extension Agent or accountant if you need assistance calculating your own margins.
Consider that by choosing the $4 margin protection level in 2016, a dairyman is indicating that he or she can withstand another $3.44/ cwt erosion in margin from the worst of 2015 before he or she wants insurance to pay. Data showed that 33% of Virginia producers had $6.50 coverage in 2015. In essence, they were willing to pay the premium of $0.09/cwt (<$4 million lbs. annual production) to guarantee no more than a $0.94 loss of their margin from 2015 lows. Another way to think about it is that by paying the $0.09/cwt premium, those producers guaranteed a net minimum margin level on their covered milk of $6.41/cwt, or the coverage threshold minus the premium payment ($6.50/cwt margin - $0.09 premium). Remember, insurance is not a breakeven calculation. The question is, “what is peace of mind worth?” $100? A $0.01 or $0.475/cwt premium? Keep in mind that there is greater flexibility by covering only a percentage of the milk produced. If you think one half of the year will be good, cover 50% of your milk. There are many ways to take advantage of this program, but it requires a different way of thinking. More importantly, it is not automatic. Don’t be afraid to seek advice. This tool can benefit your farm, but only if used wisely and not solely on emotion.
Virginia Cooperative Extension materials are available for public use, reprint, or citation without further permission, provided the use includes credit to the author and to Virginia Cooperative Extension, Virginia Tech, and Virginia State University.
Issued in furtherance of Cooperative Extension work, Virginia Polytechnic Institute and State University, Virginia State University, and the U.S. Department of Agriculture cooperating. Edwin J. Jones, Director, Virginia Cooperative Extension, Virginia Tech, Blacksburg; M. Ray McKinnie, Administrator, 1890 Extension Program, Virginia State University, Petersburg.
May 2, 2016