National Milk Officials Testify to Congress
May 26, 2016

Why The Dairy Margin Protection Program Isn’t Working as Designed

 |  By: Dairy Talk

Dairy farmers are frustrated the Dairy Margin Protection Program (MPP) isn’t performing as expected.  Now we know why it isn’t.

Randy Mooney, a dairy farmer from Rogersville, Mo. and chairman of the National Milk Producers Federation, testified before the House Subcommittee on Livestock May 24:  In order to meet USDA’s budget baseline in the 2012 farm bill debate, Congress reduced the feed cost formulas in the MPP calculation by 10%. This had a significant impact on feed costs—and the milk/feed margin.

“These margins triggered MPP at only the highest coverage level of $8 per hundredweight and only 264 farmers received payments [in 2015],” says Mooney. “Had Congress not reduced the feed ration calculation, …more than 8,500 dairy farmers would have received a benefit from MPP.”

Andy Novakovic, a Cornell dairy economist and a living, breathing, walking Wikipedia when it comes to farm bill budget details, dug out one of his old spreadsheets for me and plugged in a 10% reduction in the feed formula. See chart.  

Comparison of MPP feed formula before and after 10% reduction.

Charts: Cornell University

In 2015, the January-February margin was reported at $8/cwt. Had the 10% reduction in feed costs not been taken, the margin would have been $6.98, triggering payments. In fact, payments would have been triggered January through August had the feed formula not been adjusted, and three of the payment periods would have seen milk/feed margins below $7. With the 10% feed formula adjustment, payments were triggered just twice, and at $7.50 and $7.70.

MPP margins if feed formula had not been changed.

The big question now: Can this be fixed in the next farm bill?

Prior to the 2012 debate, the Congressional Budget Office (CBO) had to “score” the MPP and come up with a projected cost of the program. The problem, says Novakovic, was that CBO had nothing to work from because the program was brand new. Would farmers sign up? How many? At what level? It was all, by necessity, shoot-in-the-dark, pure guesswork at the time.

And when the CBO guesstimate came in, MPP costs exceeded dairy’s baseline in the USDA budget. So cuts had to be made to make it fit, and the easiest way to do that was to cut the feed-cost formula.

The goofy thing about government budgeting, though, is that past performance does not dictate future baseline projections. “How much you spent doesn’t affect the [future] baseline in any way,” says Novakovic. “The key isn’t how much you spent, but how much you expect to spend.”

In 2018, CBO budget scorers will have a little more experience in projecting MPP costs. But given the fact the current program is underperforming, one has to wonder how many will sign up for anything more than the $4 catastrophic coverage. And who could blame them?