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February 17, 2018

Dairy Margin Protection Program Worth ‘Second Look’

 |  By: Jim Dickrell

In a paper posted this week by economists Andy Novakovic and Mark Stephenson on the revised Dairy Margin Protection Program (MPP), it appears the reduced premiums, monthly calculations and weak milk futures prices in 2018 will combine to offer some risk management for smaller producers.

“The changes to the program for Tier 1 are sufficiently improved to more than justify giving the program a hard look,” say the economists. Novakovic is with Cornell University; Stephenson, the University of Wisconsin.

In its revision, Congress increased the amount of coverage offered to so-called Tier I producers, from 4 million lb. per year to 5 million. Congress also markedly reduced Tier I premium costs at each protection level. For example, under the old program, the Tier I premium for $7 of protection was 16.3¢/cwt. The new premium is just 6.3¢.  The margin calculations will now also be made monthly, rather than done bi-monthly and averaged. That means it’s much more likely margins payments will be triggered in time of low, volatile milk prices.

A decision tool to help producers through the labyrinth of MPP choices is available on the Dairy Markets website.

“As is indicated by the decision tool and obvious from any prospective market analysis in the press, it is widely expected that margins will be well below the $8 threshold and have a better than 50% probability of being below $7 through June,” say the economists. “Expected margins show improvement in July and August and the probability of payments for the last four months of the year are 1 out of 4 or 5 at the highest, $8 level.”

In Table 2 of the paper, Novakovic and Stephenson estimate the expected margins in 2018, based on futures prices on February 14. Margins will be below $8 February through July, with margins falling below $7 March through April and the lowest anticipated coming in April at $6.86. If Tier I farmers were to take our $7 coverage in those three months, they would recoup their premiums and make a few cents. If they paid the 8.7¢/cwt premium for $7.50 coverage, they would net about 50¢ on every hundredweight of milk they protect in February, March and April.

Though Congress increased the amount of milk that can be protected to qualify for Tier I premiums, it did not change Tier 2 premiums for producers who wish to protect more milk. As a result, the higher premiums would likely yield no net benefits even though margins could be below $8 six months this year.

To read the complete paper, click here.