December 4, 2017

MPP or LGM-Dairy?

 |  By: Robin Schmahl

It is nearing that time of year again when farmers are faced with the deadline to decide at which level they should sign up for under the Margin Protection Program (MPP). The deadline to make a decision is December 15th. However, this year there is another decision that can be made and that is whether to opt out of the program. I have fielded numerous calls over what to do and have discussed the pros and cons of each possibility. Those who remain in MPP need to choose a level of coverage for income over feed cost. Many have become disillusioned with this program due to its lack of effectiveness. I would not totally blame the program other than the fact that it is a nationwide calculation as well as the fact that the calculation was reduce 10 percent from the original proposal. We need to remember that it is a program protecting income over feed. A decline of the All-milk price and a decline of the price of corn, the Central Illinois soybean meal price, and the alfalfa hay price renders no payment as they both move is the same direction. The same can be said if milk price and feed prices rise. The Margin Protection Program does what it says and that is protect margin. In actuality, an income over feed cost above $8.00 is a good thing. If it falls below that level, it means feed prices are much more expensive in relationship with milk prices which is not a good thing.

Milk prices have not been as bad as many make it out to be so far this year. The November Class III milk price was announced last week at $16.88 matching the high of the year set in February. Class IV price has not faired very well with November setting the lowest price of the year. Both if these still average higher than a year ago. However, the futures market is what has turned the outlook bleak. The first four months of 2018 show Class III contracts below $15.00 with three of those contracts below $14.50 on Monday. Fundamentals that are bearish do not provide much hope of higher prices anytime soon. There are always the potential for market changes which could support prices so we should never rule that out. However, it compounds the problem when a government program does not kick in as milk prices decline. For many farmers, it feels like money is being thrown down a rat hole.

For those opting out of MPP, you have the decision of either utilizing LGM-Dairy, using the futures and option markets, or doing nothing. LGM-Dairy is gaining some interest as it does allow a producer to choose a deductible level that is subsidized by the government to some extent and it does allow a choice of pounds of corn or soybean meal fed. This can be adjusted within a predetermined parameter and will not need to be verified. Milk production will need to be verified. LGM-Dairy does allow for margin to be more farm specific. My caution for producers at this time is to be careful that you do not feel pressured to get into LGM-Dairy contracts immediately if you are no longer in MPP. There are some insurance agents, both individuals and associated with lending institutions, that are expressing the urgency to establish LGM-Dairy contract immediately. Do feel pressured into doing this as it is better to understand the program before making a decision on coverage levels and duration. I recommend holding off right now due to the current level of milk price and feed prices. Take some time to assess the market as to milk price and feed price potential. Then establish position that cover a minimum amount of months as payment will be rendered once each strip on contracts is complete. It is not a good idea to choose a strip of 6 months or more. Some of those months could result in a payment, but the strip of months will be averaged together. Use multiple contracts for two or three month durations if a decision is made to establish contracts. LGM-Dairy contracts can be established throughout the year during the short window of time each month that is it allowed.  

For those who decide to remain in MPP, this would be the year to up you level of coverage. Sign up for the $6.50 level at least which seems to be at a reasonable cost. Choose that level or a higher level up to the maximum at $8.00. This may pay out this year and provide a protection of income over feed.

If you choose MPP or LGM-Dairy this year (you cannot do both); I recommend you couple these programs with the use of options. Both MPP and LGM-Dairy are designed to protect income over feed and not milk prices by themselves. As we have seen, milk prices have declined without payment from either MPP or LGM-Dairy while the use of options or option strategies have resulted in substantial benefits. Do not just settle with MPP or LGM-Dairy as your sole marketing program for the year.