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August 23, 2017

Dairy Revenue Insurance Might Make Sense for Some Farms

 |  By: Dairy Talk

There’s been a lot of frustration with the Dairy Margin Protection Program. The biggest complaint is that it offered little or no protection as milk prices plummeted from 2014 highs.

Others have complained the feed cost formula, which was lowered 10% to fit tight budget constraints, isn’t reflective of actual feed costs. While the original formula probably mirrors costs in the Midwest, it gets skewed in other regions because of higher grain or forage costs.

Another problem is that feed costs based on market prices may or not be reflective of costs for farms that grow their feed. From an economic and farm accounting standpoint, those market prices somewhat make sense because they reflect opportunity cost. But from a practical standpoint, they don’t. Farms don’t realize greater margins when feed prices fall because they still have incurred growing costs and land rent. And when feed prices rise, dairy farms aren’t going to sell their cows in order to profit from selling home-raised feed at a higher price.

The Livestock Gross Margin-Dairy program offers an alternative to the MPP, allowing farmers to more closely align their feed costs. But LGM has its own set of constraints, most notably tight, monthly sign-up windows and the on-again, off-again nature of the program’s limited funding.

A third alternative, Dairy Revenue Protection (Dairy RP) insurance, is being proposed by the American Farm Bureau Federation. Farmers could select either a milk- or component-based pricing policy. The milk-based policy would be based on a combination of Class III and IV Chicago Mercantile Exchange (CME) milk futures. The component-based policy would allow farmers to choose the amount of milkfat and protein they wished to cover, and the value would be determined by CME prices for butterfat, protein and other milk solids.

The farmer would then determine how much milk he or she wished to insure each quarter, and whether to cover 70 to 90% of that production. After the end of each quarter, actual prices would be compared to the insured levels. If the actual prices were below those levels insured, the farmer would receive an indemnity payment.

Still to be determined is cost. But if USDA subsidizes premiums as it does crop insurance, Dairy RP could be a viable alternative to MPP or LGM-Dairy. At least farms could be assured of some level of price protection. It would still be on dairy managers to control costs. But dairy farmers are adept at doing that.

Brian Gould, a dairy economist with the University of Wisconsin, sums it up pretty nicely:

“Hopefully, in the near term, the portfolio of risk management tools available to U.S. dairy farmers will increase by the availability of RP. Let’s also hope that with the upcoming Farm Bill that reasonable modifications to the MPP program will be undertaken as well as lifting the constraints of participation in MPP and LGM-Dairy. The risk management environment faced by the U.S. dairy industry could be substantially changed from what exists today with these changes.”