The financial stability of dairy operations depends on margins, rather than milk prices alone. The economic hardship experienced in 2009, and again in 2012, testifies that high milk prices don’t guarantee profitability when teamed with high input costs.
The 2014 farm bill included a new dairy safety net program known as the Dairy Margin Protection Program, or MPP. The Margin Protection Program 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. A second sign-up period opened July 1 at local Farm Service Aency offices. Producers have unitl September 30 to sign up for coverage.
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.
How It Will Work
All dairy operations producing milk commercially are eligible to participate. If more than one producer participates in the production and marketing of milk on a single operation, all producers will be treated as a single dairy operation. If one producer operates two or more farms, each will be required to register separately to participate.
Coverage is based on a producer’s production history. In the first year, production history is defined as the highest level of milk production during 2011, 2012, or 2013. In subsequent years, adjustments will be made based on the national average growth in overall U.S. milk production as estimated by USDA. Any growth beyond the national average increase will not be protected by the program.
Producers will be able to protect from 25 percent to 90 percent of their production history, in five percent increments. They will select margin protection coverage from $4 per hundredweight to $8 per hundredweight, in 50-cent increments.
MPP Margin and Coverage Levels, 2004-2015
All producers will pay a $100 annual registration fee. Basic margin coverage of $4 per hundredweight is free. Above the $4 margin level, coverage is available for varying premiums. Currently, there are two options for paying premiums: pay the full premium at sign-up, or pay 25 percent on February 1 and the remaining 75 percent by June 1. Premiums will be fixed through 2018 as follows:
Table 1: Margin Protection Program Premiums
Table 2: Examples of Premium Costs
Payments to producers are based on the percentage of production history they choose to protect (25 percent to 90 percent) and the level of margin coverage selected ($4.00 to $8 per cwt). Payments are distributed when margins fall below $4 per hundredweight (or below the margin level selected by the producer above $4 per cwt.), averaged over any of these consecutive two-month periods: Jan-Feb, Mar-Apr, May-Jun, Jul- Aug, Sep-Oct, or Nov-Dec.
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.
During the three-month 2015 sign-up period, producers can enroll for any year between 2015 and 2018. Once a producer enrolls, he or she is committed to be in the program each year until the expiration of the 2014 farm bill. However, producers can adjust their coverage -- both the milk volume and the margin level -- annually between July 1 and September 30.