Program Details

Overview of the Margin Protection Program

In February 2018, Congress approved several significant updates to the MPP while also improving the ability for dairy farmers to use the Livestock Gross Margin (LGM-Dairy) program and other insurance options offered through USDA. Taken together, these changes are important improvements to the dairy safety net. In light of these changes, producers should re-evaluate whether MPP is an appropriate risk management tool for them in 2018.

The Dairy Margin Protection Program, or MPP, provides dairy producers with payments when dairy margins are below the margin coverage levels the producer chooses each year. Its focus is to protect farm equity by guarding against destructively low margins, not to guarantee a profit to individual producers. The program supports producer margins, not milk prices, and is designed to address both catastrophic conditions as well as prolonged periods of low margins. Under this program, the margin will be calculated monthly by USDA. Simply defined, it is the all-milk price minus the average feed cost. Average feed cost is determined using a national feed ration that has been developed to more realistically reflect those costs associated with feeding all dairy animals on a farm on a hundredweight basis.

The deadline to sign up for coverage in 2018 closed on June 22, 2018.  Learn more here.


How It Works

The program makes payments when the monthly margin between the U.S. all-milk price and national average feed costs falls below the level of coverage chosen by the producer. Above the basic, $5 margin level for the first 5 million pounds, supplemental coverage is available for purchase in 50-cent increments, up to $8/cwt. The program pays on one-twelfth of a producer’s annual production history, multiplied by the percentage of supplemental coverage chosen, from 25% up to 90%, plus the remaining coverage provided on the farm’s production history at the basic $5 level. Once a farm enrolls in the MPP, it is committed to the program through 2018.

Farmers must have an up-to-date Form 1026, signifying that they meet conservation requirements, in order to participate. 

What Constitutes a Farm?

Dairy operations that can document they are producing milk commercially are eligible to participate. Similar rules that defined a dairy operation under the expired MILC program also apply to the MPP. Multiple producers involved with a single operation are treated as a single farm, but USDA will need approval from all owners for program enrollment. Multiple farms operated by a single producer will register separately. 

Who is an “Underserved” Farmer?

USDA defines “underserved” farmers as those meeting certain criteria, including limited resource, beginning stage, veteran or socially disadvantaged farmers.

Margins and Payment Schedule

The monthly margin is calculated by the Agriculture Department using data from its National Agricultural Statistics Service (NASS) and Agricultural Marketing Service (AMS). The margin is defined as the U.S. all-milk price, minus national average feed costs, computed by a formula using the prices of corn, soybean meal and alfalfa hay. Feed costs reflect the costs associated with feeding all dairy animals on a farm, including milking cows, heifers and dry cows.

Officials margins are announced at the end of the month that follows each monthly period. Note that payments will be reduced by 6.6% due to congressional budget sequestration requirements.

Production History

Farms are awarded a production history equal to their highest milk production in either 2011, 2012 or 2013.  Participants are required to document their production history at sign-up.

Production histories increase yearly based on the average growth in national milk production, as determined by USDA. USDA said that for the upcoming coverage year of 2018, production histories have increased by 1.86%. This is on top of increases of 1.34% in 2017, 2.61% in 2016 and 0.86% in 2015. However, any production expansion on an individual farm above the national average is not eligible for protection under the MPP. Newly established farms that don’t have a full year’s production history will use either an extrapolation based on their actual production to establish a 12-month total, or the national average milk production per cow times their herd size.

If a dairy farm is sold, its production history can either move with the farmer to a new facility or stay with the farm, but not both. USDA will handle unique ownership situations and changes on a case-by-case basis.

The production history for an operation can be updated when an eligible family member joins the operation. Any dairy operation already enrolled in the MPP that had an intergenerational transfer occur will have an opportunity to increase the dairy operation’s production history during the 2018 registration and annual coverage election period.

Program Payouts 

Payments to farmers are triggered when the USDA-calculated monthly margin falls below the coverage level selected by the producer. Note that payments will be reduced by 6.6% due to congressional budget sequestration requirements.

Margin protection payments are made based on the portion of production history producers choose to protect under supplemental coverage — 25% up to 90% — and the level of supplemental margin coverage they select. As shown in the following graph, using USDA’s formula, the margin between milk prices and feed costs has varied widely from year to year. 

All producers must pay a $100 annual registration fee. Note that the U.S. Department of Agriculture is allowing farmers to opt out of the program for 2018 by not paying the $100 annual fee. Basic margin coverage of $4 per hundredweight is free. Above the $4 margin level, coverage is available for varying premiums. Premums must be paid by Sept. 1. Premiums will be fixed through 2018 as follows:

Premium Information 

There is an annual fee of $100 to enroll in the program (which is waived for underserved farmers, as defined on Page 2). This guarantees a catastrophic level of coverage, now defined as $5.00/cwt., on the first tier of production history. Farmers can choose additional coverage in 50-cent increments above $5, up to $8/cwt, on their first 5 million pounds.

Table 1 (below) illustrates how the new law reduces the rate of premiums on each farm’s first 5 million pounds of annual production history. Farmers covering milk production in the second tier, above 5 million pounds, can purchase coverage ranging from $4.50-$8.00. All farmers using the MPP receive catastrophic coverage on 90% of their milk production history.

There are several options for paying premiums: 1) Participants can pay the full premium at sign-up; 2) They can pay 25% of the premium by Feb. 1 of the applicable calendar year of coverage, with the remaining balance due no later than Sept. 1 of the calendar year of coverage; or 3) they can arrange deductions from their monthly milk check. Those who have not paid their premiums by the deadlines will be in default, and will not receive benefits for any subsequent two-month period until their situation is corrected. 

Table 1: Margin Protection Program Premiums

Payments to producers are based on the percentage of production history they choose to protect (25-90 percent) and the level of margin coverage selected ($4.00 to $8/cwt). Payments are distributed when monthly margins fall below $4/cwt. (or below the margin level selected by the producer above $4/cwt.).

How the New Law Expands Other Risk Management Options 

The new legislation also removes the $20 million annual cap on all livestock insurance programs, including the Livestock Gross Margin for dairy (LGM-Dairy) program. The elimination of this cap will enhance the development and approval of new programs by USDA’s Risk Management Agency for dairy producers that can complement MPP-Dairy, including a new option under development to offer revenue protection. The law still restricts farmers to using either the MPP or the LGM program, but not both programs simultaneously. That restriction should not apply to new risk management options that USDA may develop, and will likely be of particular interest to larger producers.

Donation Program

The farm bill also created a Dairy Product Donation Program triggered in the event of extremely low operating margins for dairy farmers. It also provides nutrition assistance to low-income individuals by requiring USDA to purchase dairy products for donation to food banks and other feeding programs.

This program will activate if margins fall below $4 per hundredweight for two consecutive months. It requires USDA to purchase dairy products for three consecutive months, or until margins rebound above $4. The program will also be suspended if U.S. dairy prices rise above international prices. Purchased products will include those that will help increase farmers' margins, as well as those needed by food banks. USDA cannot store the dairy products it purchases, and organizations receiving the products are prohibited from selling them back into commercial markets.

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