New Dairy Title: What It Will Mean at the Farm

2/8/2014 7:00 AM
By Charlene M. Shupp Espenshade Special Sections Editor

On Tuesday, the U.S. Senate followed the House’s lead and passed the Farm Bill, sending it to President Barack Obama for his signature Friday.

In the farm portion of the bill, the dairy title had been a point of contention as the conference committee worked to resolve differences between House and Senate versions of the bill.

“This is not your father’s Farm Bill. It’s a new direction for American agriculture policy,” Sen. Debbie Stabenow, chairwoman of the Senate Agriculture Committee said after the reconciled bill’s passage.

“It has been a long and torturous road toward the creation of a better safety net for dairy farmers, but with (the) vote in the Senate to approve the Farm Bill, coupled with last week’s House vote, that five-year journey has reached its end,” said Jim Mulhern, president and CEO of the National Milk Producers Federation.

The bill’s new Dairy Producer Margin Protection Program replaces several old risk management programs. It also will eventually replace the Milk Income Loss Contract program.

MILC will continue until the margin program is finalized or until Sept. 1, whichever comes first.

Producers who sign up for the Margin Protection Program are ineligible to sign up for a Livestock Gross Margin-Dairy policy.

An additional program, called the Dairy Product Donation Program, gives permission to the U.S. Secretary of Agriculture to distribute dairy products to food assistance programs in times of low dairy prices.

“There will be a process for USDA to fully implement the bill they have,” said Andrew Novakovic, Cornell University agricultural economics professor.

Rules for the program are yet to be developed and will include how to collect premiums and indemnity payouts.

Novakovic said he is unsure if Sept. 1 is for the announcement of the program or if the rules will be made available. “MILC is on the books until then, no one is expecting it to kick in” because of the high milk prices.

Novakovic, along with John Newton of the University of Illinois and Mark Stephenson of the University of Wisconsin, discussed the new dairy title during a webinar on the University of Wisconsin’s Dairy and Policy website.

The Margin Protection Program pays participating farmers an indemnity when a national benchmark for milk income over feed costs falls below an insured level.

Newton said 85 percent of farms will fall under the 4 million pounds production cap of the program with larger farms paying a higher premium.

“This premium is designed to help smaller farmers,” he said.

Under this program, the margin will be calculated monthly by USDA and is simply defined as the all-milk price minus the average feed cost.

Average feed cost is determined using a feed ration that has been developed to reflect the costs associated with feeding the entire dairy enterprise, consisting of milking cows, heifers and other related costs.

All dairies are eligible to participate in the program.

Penn State dairy economist Jim Dunn said he believes this new basic program will be more “user friendly” for dairy producers compared with LGM-dairy.

“For a hundred dollars per year, they get a zero-premium, catastrophic coverage of a $4 per hundredweight margin on up to 90 percent of their marketings or 4 million pounds of milk,” Dunn said. “This would give them several payments in years like 2009 and 2012.”

According to Alan Zepp, risk-management specialist for the Pennsylvania Center for Dairy Excellence, “The process of evaluating the correct coverage level will improve many producers’ understanding of price risk management.”

Zepp said computer programs will be developed to assist farmers in analyzing and researching risk-management options.

In the first year of the program, insurance coverage will be based on the volume of milk equivalent to the producer’s production history. That will be defined as the highest production level of annual production during 2011, 2012 or 2013.

Later adjustments to the production history will be made based on the national average for U.S. dairy production, as determined by USDA estimates.

Additional growth will not be protected by the program. Farmers will be able to protect between 25 and 90 percent of their production history in 5 percent increments.

Margin coverage will range between $4 and $8 per hundredweight. Insurance premiums will be fixed for the first five years of the program.

Newton said that historically, the average income over feed costs margin has been $8.35.

To participate in the Margin Protection Program, farmers will have to pay an annual administrative fee of $100 per year.

Confused?

Zepp will compare costs and coverage for these margins as part of his monthly “Protecting Your Profits” conference call. The next one is scheduled for noon on Feb. 26.

This new program is not free of criticism.

Dunn said the program does punish farmers who expand their dairy for any reason because milk production on average grows only 1 to 2 percent annually.

“Greater efficiency is usually the reason for growth, and I think discouraging this is counterproductive as a long-run strategy for the industry,” Dunn said.

The new dairy title also does not take into consideration what Dunn believes is the real problem in the dairy pricing system.

“I think this does not address the real source of volatility, which is basing the prices on the CME product prices,” he said.

“It should reduce the troughs somewhat, and I suppose make the peaks higher or longer since it discourages producers from responding to better prices with a production increase,” Dunn said.

The new Dairy Product Donation Program would be triggered in the event of extremely low operating margins for dairy farmers. It will provide nutrition assistance to low-income groups by requiring USDA to purchase dairy products and donate them to food banks and other feeding programs.

The new program will activate only when margins fall below $4 for two consecutive months and will require USDA to purchase dairy products for three consecutive months, or until margins rebound above $4. The program also will trigger out if U.S. prices exceed international prices by more than 5 percent.

Novonic said he would advise farmers to not get “too far down the road” with one of the insurance programs before the USDA finalizes its rules.

“Check with an authoritative source and not listen to the rumor mill,” he said.

Additional information on the dairy title; the Stephenson, Novonic and Newton webinar; and a summary about the title changes can be found at http://dairy.wisc.edu/.


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10/25/2014 | Last Updated: 11:16 AM