New Dairy Margin Protection Programs In The 2014 Farm Bill

By Kim Dillivan

Following four years of negotiation, a new five-year farm bill was recently signed into law. The Agricultural Act of 2014 provides changes to many food and agricultural programs, including programs in federal dairy policy as part of the Commodity Title. These changes include the replacement of three dairy provisions with two new programs. An important new safety net program is the Margin Protection Program for Dairy Producers (MPP).

Margin Protection Program for Dairy Producers

The MPP is a voluntary safety net program that provides producers with indemnity payments when a national benchmark for dairy income minus feed costs (i.e. a margin), falls below coverage levels producers select on an annual basis.

The MPP contains four main components:

• Actual Dairy Production Margin (ADPM)
• Actual Dairy Production History (ADPH)
• Coverage Percentage, and
• Coverage Level

The ADPM is defined as the difference between the national average price ($/cwt) of milk, and the cost of the three primary feed ingredients (corn, soybean meal, and alfalfa hay) that comprise the majority of rations fed on dairies. This feed cost is determined by the national average price for corn and alfalfa, based on the monthly Agricultural Prices Report by USDA National Agricultural Statistics Service, and the central Illinois price for soybean meal, reported by USDA Agricultural Marketing Service.

The ADPM formula is:
 
ADPM = Average Milk Price (all grades) in $/cwt

    less         1.0728 multiplied by corn price ($/bu)
    less         0.00735 multiplied by soybean meal price ($/ton)
    less         0.0137 multiplied by alfalfa hay price ($/ton)

These feed ingredient prices are weighted so that this summed value represents the composition and cost of a typical dairy ration that produces 100 pounds of milk. It is a herd-level feed cost of producing 100 pounds of milk and, as such, includes the amount of feed fed to dry cows, replacements, and calves.

This calculation includes a specific mix and proportion of feed ingredients that remain constant. It also includes representative prices for milk and feed ingredients. This calculation does not necessarily equal an individual producer’s margin, but it is assumed that producer margins will correlate with this calculated margin.

National average feed cost and milk price are calculated monthly, but the Actual Dairy Production Margin (ADPM) will be calculated for each consecutive 2-month period, using milk price and feed cost averages for those 2 months. Specifically, the calendar year is divided into 6 periods consisting of consecutive pairs of months (e.g. Jan/Feb, Mar/Apr, May/Jun, etc.). So, six times annually, USDA will calculate a margin to determine whether indemnities are paid.

Participating dairies will be assigned an Actual Dairy Production History (ADPH) based upon their highest annual production in 2011, 2012, or 2013 calendar years. In future years, ADPH will likely be adjusted by the Secretary of Agriculture to reflect changes in US milk production. New dairies that have been operating less than a year will estimate annual production by either extrapolating monthly amounts to an annual estimate or by using their actual herd size and national yield amounts.

Participating producers will elect what percent of their milk production to be covered (i.e. “Coverage Percentage”) and the level of margin coverage (i.e. “Coverage Level”). These annual elections will determine their total annual premium and their potential indemnity payments. Producers may elect a Coverage Percentage between 25% and 90% of their ADPH, in intervals of 5%. Producers also elect their Coverage Level from $4/cwt up to $8/cwt in intervals of $0.50/cwt. If the ADPM for any 2-month period falls below a producer's elected margin Coverage Level, this difference will be paid on the Coverage Percentage of their ADPH divided by 6.

Annual premiums are based on production history and level of coverage. For dairies with 4 million pounds of milk or less in their production history, the premium per cwt for each level of coverage is shown in the second column of Table 1. Premiums increase as margin coverage increases. Premiums are also higher for larger production levels.

For participating dairies that exceed 4 million pounds of milk production, the rate from the second column of Table 1 will be charged on the first 4 million pounds, and the rate from the third column of Table 1 will be charged on production greater than 4 million pounds. To encourage participation in the program, particularly for smaller scale producers, premiums association with milk production of 4 million pounds or less (second column) will be reduced by 25% each calendar year for producers participating in 2014 and 2015.

Table 1. MPP Producer Premiums by Coverage Level and Production