Cash and safe.
September 8, 2017

Opt Out of Dairy MPP at Your Peril

 |  By: Dairy Talk

Farm groups were generally supportive of the United States Department of Agriculture announcement Aug. 31 that current participants in the Dairy Margin Protection Program could opt out in 2018. To opt out, farmers would simply not pay the $100 administrative fee and would therefore not be eligible for the $4/cwt catastrophic margin coverage.

“[The] announcement to allow farmers to opt out of the program in 2018 is a welcome development, in that it acknowledges the widespread dissatisfaction among farmers enrolled in the program,” says Jim Mulhern, CEO and president of the National Milk Producers Federation. “Simply put, the way the program was enacted in the 2014 Farm Bill, it does not meet the needs of America’s dairy farmers today, and declining participation levels amply illustrate farmers’ disenchantment with the MPP.”

Adds Zippy Duvall, president, American Farm Bureau Federation (AFBF): “The American Farm Bureau Federation is pleased by today’s announcement by the Agriculture Department to allow dairy farmers to exit the Margin Protection Program for dairy producers. Dairy farmers need access to effective risk management tools. Farm Bureau and our grassroots members look forward to working with USDA and Congress to enhance the dairy safety net.”

Opting out of the MPP has one benefit: Dairy farmers could then enroll in the Livestock Gross Margin-Dairy (LGM-Dairy) insurance program. In many ways, LGM-Dairy is much more attuned to milk and feed price conditions on individual farms. Farmers can fine tune their risk management to meet their specific needs and costs.

But LGM-Dairy is much more complicated than MPP. Farmers must take the time to figure out what levels of insurance work best for them. Then they must hope they can get coverage during the narrow, one-day sign-up period each month. Very few dairy farmers, at least to date, have been willing to put in the work or have the perseverance to routinely use LGM-Dairy insurance.

AFBF is also working on its own form of revenue insurance, patterned after crop insurance. Farmers could select either a milk- or component based pricing policy. 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. At 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. However, it’s not known at this point whether the insurance will be approved in time for 2018.

Farmers have until December 15 to decide whether to participate in the Dairy MPP for 2018. Automatically deciding not to participate, particularly at this early date, is nonsensical. There are still too many unknowns, and too many Black Swans circling the horizon.

There’s the uncertainty of North American Free Trade Agreement negotiations, what will happen in Korea and what President Trump will do with trade with China. Saving $100 because farmers are miffed at MPP is a knee jerk reaction that leaves them vulnerable to a catastrophic meltdown in markets.

While such a meltdown is unlikely,  betting (and losing) $100 that it won’t happen is about as cheap of insurance you can get.