Dairy margin programs: what to know

Dec. 5 is fast approaching and with it, the deadline for the first sign-up period for the 2014 farm bill’s Dairy Margin Protection Program.

For the dairy industry, this new program ushers in a different approach to protect the nation’s ability to produce milk domestically — which is why there is a farm bill and farm programs.

Historically, we have had a Class III support price, most recently set at a profit-busting $9.90 per hundredweight. When the support price was initially used to protect the nation’s milk supply, it increased each year, and the actual milk price did not vary substantially from the support price.

Since the support price was fixed at $9.90, markets have changed with domestic prices heavily influenced by global supplies and exports. Meanwhile, the milk price now fluctuates dramatically, and when it fell below $9.90, which it did in 2009, the industry bled equity at a rapid rate.

Endangering equity. Higher Class III prices in the recent past were largely offset by high feed prices, continuing to endanger equity. While the MILC (Milk Income Loss Contract) program — a previous farm bill program — was adjusted to try to compensate for the relationship between milk and feed prices, it provided limited assistance to farms selling more than 2.4 million pounds of milk.

Following several years of industry-wide discussion and multiple proposals on how to support America’s dairy industry, the Dairy Margin Protection Program was rolled out with the passage of the 2014 farm bill.

Once rules were announced, there has been a relatively short period of time to learn about the program and make a participation decision while finishing up the 2014 harvest and dealing with nature’s recent blast of arctic air.

It is very important to understand that with the initiation of the Margin Protection Program in September, there is no longer a Class III support price, or the MILC program. They are off the books.

Margin protection

Congress initiated a new approach to protect farm equity, emphasizing protection of a margin between the U.S. all-milk price and the reported prices for corn, soybeans and hay at levels representative of the average purchase of these feeds on an average farm.

This “margin” is a national one; in other words it does not specifically represent any one farm in the country.

You will need to determine how this calculated margin relates to your farm. Unless you have been trying hard to ignore the program, you should already know the basics: Each farm should look at the potential cost of coverage at different margins and for varying percentages of their production history.

Go to http://dairymarkets.org and use the MPP decision tool to see the current margins projected for the coming coverage year.

Realize that these are based on yesterday’s markets (they are updated each evening). What they do not reflect are events that will happen in the coming year that we cannot predict such as global events that impact exports, weather in 2015’s growing season, etc.

Use the decision tool to see how this program would have performed in the past 10 years. Look at the years that were a challenge for your farm and see what the projections looked like at the time you would have had to make a decision.

The review the net indemnities would have been paid (or not) given different levels of coverage. This exercise is well worth some of your time.

Possible outcomes

When margins are good, you may pay premiums and receive no indemnities, essentially an insurance premium paid, with no need to make a claim. If margins go south, you may receive an indemnity to help cover operating costs depending on your chosen level of coverage.

Each farm must review the information available and make a decision about their farm’s participation. If the farm has strong cash reserves and a solid equity position, then choosing the catastrophic $4 level for $100 may be a good choice. If you have reservations about next year’s margins and/or have higher levels of debt or small cash reserves, buying up coverage to a higher level may make good sense.

There are a few requirements for participation that should be considered. If a farm enrolls in the program they are committed for the next 4 years.  Enrolled farms cannot participate in the Livestock Gross Margin Insurance program for the next four years.

Enrolled farms must employ good soil conservation practices. Invest some time if you still have to make this decision.

Tools and information are available at the dairy markets.org website. Contact your Extension or FSA office to help answer questions.

If you have already enrolled, you can change your coverage election before Dec. 5, just don’t wait until Dec. 5 to start the process.

Margin protection basics:

• Farmers may choose to participate in 2014 and/or 2015 by working with their county Farm Service Agency to establish their production history (PH). The PH will be the highest amount of milk sold in 2011, 2012, or 2013.

• 2014 is almost off the books, and there appears to be no incentive to enroll for what will amount to December’s margin. Barring an unforeseen catastrophe, the margin should be well above $8 per cwt. It is likely that most farms that choose to participate will enroll only for 2015.

• If farmers choose to participate, they will enroll in the program and pay a $100 administrative fee at sign-up. Once enrolled, you are committed to participate through 2018 and to pay the $100 administrative fee each year.

• The $100 administrative fee will automatically provide a catastrophic (CAT) margin coverage of $4 per cwt. on 90 percent of the farm’s production history each year.

• Farmers can choose to “buy up” coverage from $4.50 to $8 per cwt. in 50 cent increments on anywhere from 25 percent to 90 percent of their production history. A farm can choose different levels of coverage each year or default to the CAT coverage.

• The premiums for buying up coverage are set for the life of the farm bill, until 2018. Fees should be a deductible expense.

• There is a 25 percent premium reduction for 2015. This reduction applies to premiums for the first 4 million pounds of milk up to the $7.50 margin.

• If a farm is buying up coverage for more than 4 million pounds of milk, the lower premium schedule will apply to the first 4 million pounds of milk covered, with any milk over 4 million pounds triggering the higher premiums.

• The only way a farm’s production history will increase through 2018 is through an annual increase announced by FSA (referred to as “the bump”) which will be applied to the PH starting with the year a farm enrolls in the MPP. Farms enrolling for 2015 will automatically have their production history increased by 0.87 percent. The bump is based on the national increase in milk production.

• The national margin will be calculated for two-month intervals, i.e. Jan/Feb, March/Apr, etc. and indemnities will be paid if the average margin for that two-month period falls below the margin a farm has covered. For instance, if the average margin for Jan/Feb fell to $6.40, and the farm had protected a $6.50 margin, then the farm would receive an indemnity payment of $0.10 per cwt. for 1/6th of their production history.