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July 31, 2017

Prospects for Proposed Dairy MPP Changes ‘Fairly Good’

 |  By: Jim Dickrell

Two prominent dairy economist say the prospects for inclusion of proposed Dairy Margin Protection Program (MPP) changes in an upcoming Congressional Appropriations bill are “fairly good.”

The Senate Agriculture Appropriations Committee has voted to change the dairy margin calculation from bi-monthly to monthly, thereby increasing the chances of an indemnity payment. It also increased the threshold for Tier I farms from 4 million lb to 5 million lb annual milk production (from about 185 cows to 223 cows). Tier I premiums are lower than those for larger farms. The Committee also voted to further reduce Tier I premiums.

Andy Novakovic, Cornell University, and Chris Wolf, Michigan State University, summarized upcoming dairy issues that will be debated in both farm bill and other upcoming legislation. Their conclusion: “Whether or not the aforementioned amendments to MPP-Dairy survive in the final appropriations legislation remains to be seen but the prospects are fairly good.”

The analysis was prepared for the summer meeting of the Agricultural and Applied Economics Association next week. The full text of their comments follow:

Policy Setting: From the Agricultural Adjustment Act of 1933 to the Trade Agreements Extension Act of 1951, the US dairy sector slowly developed a formidable set of policy tools that gave it 1) farm price regulation in the form of Federal Milk Marketing Orders, 2) price supports, and 3) tight import quotas. Slowly these impactful, historic programs are being eroded and dismantled. Import quotas were replaced with the more generous market access requirements and more modest tariff rate quotas of the Uruguay Round Agreement on Agriculture. Since 1996, the US dairy sector has become an open economy and emerged as the second largest dairy exporting country in the world. Milk price support legislation still exists in permanent law, the Agricultural Act of 1949, but that tool essentially was abandoned in 1990 and replaced by income supports that have provided less support to dairy farmers. Marketing Orders remain much as they have been, perhaps in no small part because they do not require reauthorization within the farm bill.

The Agricultural Act of 2014 introduced a new income support program called the Margin Protection Program for Dairy Producers or MPP-Dairy. Although it should properly be thought of as income support, this program is designed to mimic a net revenue risk management program. A national "margin" is calculated as the difference between the national average price of milk and a cost of feeds calculated from prices for corn, alfalfa hay and soybean meal. For a modest fee, any farmer can sign up for "catastrophic coverage" and for increasingly larger "premiums" they can elect higher levels of coverage, ranging up to a value close to a 10-year average margin. MPP-Dairy replaced the Milk Income Loss Contract (MILC), a more straight-forward income subsidy based on a milk price trigger. MILC was judged as insufficient in magnitude and scope. Among the goals for its replacement was to build a new program which recognized that high feed prices can be just as challenging to dairy farms as low milk prices.

Farm Bill Issues: MPP-Dairy first became available in 2015 and has just entered its fourth sign up period. About half of US dairy farmers chose to participate in the program in 2015, and over half of those elected "buy-up" coverage. Believing that the program did not pay out as generously in 2015 as it should, the sign-up for 2016 saw only 23% purchase "buy-up" coverage. For 2017 the share fell to less than 8% (percentage of dairy farmers who signed up for the programs). Arguments to the effect that one does not actually want insurance to pay notwithstanding, dairy farmers generally argue that if this new program did not provide income subsidies in 2015 and 2016 then it falls far short of their expectations. Although 2017 was correctly expected to be a year with no payment due to an increasing margin, lack of faith in the program is increasingly evident in the sign-up statistics. Further evidence of farmer disappointment with the program includes the many policy initiatives to reform and improve MPP-Dairy introduced in 2017. The most recent is a significant and fairly costly tweaking of the program that has been levered into the Senate appropriations bill.

What to Watch: At this point, there is no organized interest in legislatively changing Marketing Orders. Dairy trade policy has become a point of discussion with the demise of the TPP and the effort to revisit NAFTA. For the time being, these are Executive Branch agendas with uncertain outcomes. Agriculture advocates and like-minded Members of Congress are primarily focused on doing no harm to trade prospects with our two largest dairy trading partners. Whether or not the aforementioned amendments to MPP-Dairy survive in the final appropriations legislation remains to be seen but the prospects are fairly good.