February 1, 2017

Managing Risk Key to New MPP

 |  By: Mike Opperman

It’s a safe bet that the Margin Protection Program (MPP) initiated through the last Farm Bill won’t make it through the next without major changes. That’s not disappointing news to most of the dairy producers who participated in the program, paying out considerably more than they received in return. A panel of experts at the International Dairy Foods Association Dairy Forum outlined changes that need to happen to make the program beneficial.

“Volatile milk prices still exist but we need a safety net to guard against a catastrophe in prices,” says Chris Noble, co-owner of Noblehurst Farms, Inc. in Linwood, New York. “That’s what the MPP was designed to protect us against.”

Problem is some producers saw MPP as more than that. “I fear that when it first came out some producers viewed MPP as a risk management tool,” says Tiffany LaMendola, senior director of risk management solutions with Blimling and Associates, Inc. “But it hasn’t worked that way. I think people have realized that it might be a good supplement but those that are proactive about managing risk are determining how to balance MPP with other risk management tools.”

Some of those other options include the Livestock Gross Margin program (LGM Dairy). It’s an insurance program like MPP, but allows for monthly enrollment so producers can decide to use or not use depending on margin projections. With MPP producers are signed up for the life of the Farm Bill within which it was developed, and there is an annual enrollment option.

Producers can’t be enrolled in LGM and MPP at the same time, something Nobel says he hopes will change. “Because LGM and MPP are separate from each other I have to make the decision every year if I’m going to participate in one or the other,” he says. If it looks like the market is going down significantly, he’ll enroll in MPP. If not, he considers LGM. Right now he’s not covered in MPP because he doesn’t see downside market risk.

“MPP is a safety net program and LGM is more of a risk management program so it would be nice to be able to retain the option to use both if possible,” Noble says.

Changing MPP is on the radar and there are a number of proposed solutions from regionalization to increasing premiums. In the end it comes down to the ability to use more tools to manage risk, and right now government-established programs are limited by budget constraints. “If we look at the livestock sector it’s a $150 billion per year business, but Federal crop insurance allocated toward livestock is capped at $20 million,” says John Newton, director of market intelligence at the American Farm Bureau Federation. That cap limits the amount of funds allocated to the LGM program and limits opportunities for dairy producers. “Raising that cap could bring in more private industry to develop more innovative risk management tools. Dairy producers need to have the same tools for risk management as other farmers do.”  

Recently the American Farm Bureau Federation announced details of a potential insurance program mirrored off of the existing crop insurance platform. 

Like most producers, Noble would be in favor of more options to manage risk. “The more flexibility dairy producers have from a risk management standpoint with the government’s blessing will help the industry.”

From a lending standpoint, a producer’s ability to manage risk is important when bankers are considering loaning resources. “The first responsibility is for producers to manage risk,” says Sam Miller, managing director and head of agriculture at BMO-Harris Bank. He sees adjusting MPP or other government program to add in more crop-insurance type elements into a dairy portfolio as a good opportunity. “Selfishly it would be good for me because it would provide greater certainty, which is what banks want. But it would be beneficial for producers because they would be better able to manage risk.”