Dairy Parlor
November 11, 2016

Can the Dairy Margin Protection Program be Fixed?

 |  By: Jim Dickrell

Few dairy farmers who signed up for the Dairy Margin Protection Program (MPP) have been pleased with the results.

Though $11 million in indemnities were paid out last summer, the payments went to just 4,852 farmers who bought up coverage at the $6 to $8 levels. But for the nearly 21,000 dairy farmers who signed up for lower levels of coverage, the program paid nothing. “The program hasn’t worked well because people haven’t signed up for anything more than the $4 catastrophic level,” says Scott Brown, a University of Missouri dairy economist. Brown spoke at the 2016 MILK Business Conference here in Las Vegas this week.

Even though milk prices softened 30% or more from 2014 peaks, cheap corn is another reason for unhappiness with the program. Cheap feed means wider milk-feed margins which in turn means fewer payments.

A third problem is Congress tweaked the margin formula calculation early in the Farm Bill debate, automatically reducing the margin by 10%--usually by $1/cwt—which lowered the probability of indemnities payments.

The reason Congress did so was to fit the MPP program within budget constraints. USDA’s budget baseline for dairy programs is just $30 million per year for the next decade. But annual U.S. dairy receipts are $40 billion per year. “So how do you have a program where you spend $30 million and are trying to protect $40 billion in receipts?” asks Brown.

In contrast, USDA budget baseline is $4 billion for corn with annual cash receipts of $55 billion. “You can do a lot more when you have more baseline to spend,” says Brown. Since federal deficits aren’t going to disappear, budget constraints will be the biggest challenge Congress, USDA and dairy farmers will face in developing an effective dairy safety net, he says.

Brown says there are a number of options that could be considered, but all of them will cost additional money. Possible changes:

• Calculate the milk-feed margin on a monthly basis rather than bi-monthly. “Had this been a feature of the program in 2016, payments would have gone up,” says Brown.

• Make premiums refundable if there are no payouts. That would lower the cost of the program to farmers, but it would make MPP less like an insurance program and would also likely increase program costs.

• Reduce the amount of annual milk production history that is covered. Recall that the Milk Income Loss Contract (MILC) covered only 34 or 45% of a farm’s production history. MPP covers 25 to 90%, driving up indemnities paid out to farmers and the cost of the program to the USDA. One idea is to limit coverage to 70% of production history while making other changes to the program that increase the frequency of payouts.

• Regionalize margin payments. Regionalization would better align milk-feed margins locally. But it’s not a cure-all. Historically, says Brown, payments would have increased in a year such 2016 but decreased in a year such 2012.

• Raise the range of trigger levels to $5 to $9 rather than the current $4 to $8. This would essentially have the same impact as increasing the feed cost co-efficient by 10%, and could result in 25¢/cwt higher indemnity payments.

• Reduce premiums to entice farmers to participate at higher margin levels. Missouri actually tried this approach with its Dairy Revitalization Act, offsetting 75% of premium costs. But few farmers took advantage of the program, notes Brown.

• Revise the program to be more like crop insurance where premiums and coverage levels adjust over time, and allow more flexible sign-up options. “This program path could provide more program flexibility,” says Brown. 

In the end, budgets and timing will be everything. Some hope that a fixes could be accomplished next year. “The timing of the next farm bill passage remains unclear,” says Brown. He notes it took two years to enact the 2014 farm bill. “Is this time different?”

Margin Protection Program at MILK Conference

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