You'll Never Guess Where You Can Get a 4:1 Return on Your Money
Revisions to the Margin Protection Program (MPP), proposed in the yet-to-be approved new farm bill, could offer dairy farmers a 4:1 return.
The estimate is based on what returns would be if feed and milk margins are similar over the next five years to what they were between 2014 and 2018. The better returns are based on lower premium costs and raising the top margin to $9 for the first 4 million pounds of a dairy farm’s production history, says Mark Stephenson, director of Dairy Policy Analysis at the University of Wisconsin. He spoke today at World Dairy Expo.
Under proposals passed by the U.S. House and Senate, MPP premiums would be just 17¢/cwt for $9 coverage for Tier 1 production under the House bill and 18¢/cwt under the Senate bill. If margins are similar to what they had been over the past five years, the MPP payments would average 73¢/cwt under the new farm bill, says Stephenson.
“The margin has been below $9 about half the time since the program was begun in March 2014,” says Stephenson. The 73¢/cwt margin represents a 400% return on investment with premiums of 17¢ or 18¢.
“I think producers will need to look at this remodeled MPP,” says Stephenson. “An 18¢ investment for a 73¢ return looks pretty good on the first 4 million pounds of production history. This should be basic risk management.”
Congress would also allow farmers to take both MPP coverage and Livestock Gross Margin-Dairy insurance, though not on the same milk production. There are subtle differences to the House and Senate versions of the dairy title.
Both versions would re-name the MPP program, recognizing that many dairy farmers have soured on it because it did not perform as expected. The House would call its new program the Dairy Risk Management Program (DRMP) and the Senate would call its version “Dairy Risk Coverage.”
Both would offer $9 milk-feed margin coverage levels for Tier 1 production (up to 4 million lb of production history.) But rather than covering 25 to 90% of that history, both bills would allow farmers to cover from 5 to 90% of their production, which would allow large farms to cover more of their production history.
Under the House bill, farmers could make only one coverage selection for the life of the farm bill. Under the Senate bill, farmers could choose their coverage levels annually. The House bill offers slightly lower premiums, while the Senate bill would discount premiums 50% for producers with less than 2 million pounds of production history and 25% for production histories between 2 and 10 million pounds.
The Senate bill would also prohibit any refunds of premiums paid when there was no indemnity paid.
In addition, both bills would change how Class I prices are calculated. Under the current farm law, Class I prices are based on the “higher of” Class III or IV prices. Under the new bill, Class I prices would take the average of Class III and IV and add 74¢/cwt. “This is about revenue neutral but would reduce basis risk for futures market hedging,” says Stephenson.
The House-Senate Conference committee met last month, but failed to come up with a final bill. Given that mid-term elections are in five weeks, Stephenson doesn’t believe a farm will be approved any time soon. Congress could pass a continuing resolution to keep current programs in place, and make a final push on the farm bill in January. “This is normal,” says Stephenson.
Others believe Congress could act before the first of the year. Chris Galen, a spokesperson for the National Milk Producers Federation, believes Congress could pass the bill in the lame duck session after the elections but before the new Congress is seated. “The four principals on the Conference Committee may not want to refight these battles next year,” he says.
All dairy farmers can do is wait and see. But it might behoove them to study the new proposals to see if they will be of benefit for their farms, says Stephenson.
In any event, farmers can enroll in the new dairy Revenue Protection (RP) insurance that is being rolled out this month. The first day to sign up for that product is Oct. 9. “RP insurance is not a bad program, but it won’t bail you out of low prices,” says Stephenson. Because it is based on the dairy futures market, it can only offer protection based on the level of futures prices.