money
November 23, 2016

The Costs of Fixing the Dairy Margin Protection Program

 |  By: Dairy Talk

There’s lots of discussion swirling around how to fix the Dairy Margin Protection Program (MPP). Actually, fixing the program is the easy part. Paying for it is the really, really hard part.

The problem is that Congress has given the United States Department of Agriculture (USDA) just so many dollars to spend on dairy programs. The August 2016 Congressional Budget Office (CBO) baseline was approximately $50 million per year net MPP premiums.

To meet initial CBO baselines, Congress discounted the feed formula 10% very early in the last Farm Bill discussion. Over the past 1 ½ years, the MPP margins would have been about $1/cwt lower than USDA’s announced margin, according to analysis done by the American Farm Bureau’s (AFBF) Farm Bill Working Group.

Had that adjustment not been made, MPP payments would have been $17 million higher in 2015 and $36 million higher in just the first six months of 2016, estimates AFBF. Because dairy farmers had signed up in droves in 2015 and paid in $72.3 million in MPP premiums, USDA’s $50 million baseline budget number would not have been tested.

In 2016, when roughly 80% of dairy farmers opted for $4 coverage, they paid just $22.8 million in MPP premiums. “August 2016 CBO expectations were for nearly $192 million in MPP payments, but rising milk prices and lower feed costs limited MPP payments to approximately $12 million,” says John Newton, AFBF director of market intelligence.

The net effect of this is that the dairy baseline could shrink even further by the time new projections are made in 2017. “Continued participation at lower coverage options would lower projected outlays and make it even more difficult to improve MPP,” says Newton.

Another option being widely discussed is to regionalize margins. Dairy farmers in the West complain USDA’s milk-feed margin doesn’t reflect their cost structure. But the National Milk Producers Federation, in its Foundation for the Future plan that conceived the MPP program, wanted to avoid regional conflict and opted instead for a national plan.

The AFBF’s analysis clearly shows regional differences. California, New Mexico and Arizona are all more than $2 below the national average margin. States in the Deep South, from Virginia to Florida and from Tennessee to Mississippi, are all $2 above the national average margin. States in the nation’s more traditional dairy areas are typically 50¢ to $1.50 higher than the national average margin.

Clearly, there will be winners and losers if regional feed and milk prices are used. (I’m already hearing rumblings from some in the Midwest that they are opposed to regional pricing.)

According to the AFBF analysis, adjusting for feed only would have increased MPP payments from $730,000 in 2015 to $2 million, and increased payments from about $11.2 million to about $25 million through June 2016.

But a more fair way to calculate margins, using both regional feed and milk prices, would have increased MPP payments by $49 million in 2015 and $30 million through June 2016. And by inference, states with low margins would have gotten more of these payments than farmers in other regions with the higher margins.

There are other options as well, such as increasing coverage levels to cover more costs than just the milk-feed margin, some type of revenue insurance program or reverting to a Milk Income Loss Contract (MILC) type of program.

Frankly, it’s enough to make your head spin. In the end, however, it still all comes down to CBO’s budget baseline number for dairy. In March, we’ll get a new number—and you can bet it won’t be going up.

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