Dairy provisions help smaller farms most
Dairy provisions of the recently signed farm bill suggest farmers with fewer than 200 cows will pay cheaper, more highly subsidized margin insurance premiums.
The deal that these smaller farms receive is even sweeter the first two years of the five-year program, with premiums discounted 25% for the first 4 million pounds of production.
The bill, signed into law by President Obama on Feb. 7, directs the Secretary of Agriculture to establish a dairy margin insurance program by Sept. 1, 2014. In the interim, the Milk Income Loss Insurance (MILC) program is reinstated through Aug. 31, 2014.
"The dairy subtitle of the new Agricultural Act offers a total revamping of the safety nets that have been in place for the dairy sector going back to the middle of the 20th century," say five dairy economists who released an analysis of the farm bill in late January.
That analysis was done by Marin Bozic, University of Minnesota; John Newton, University of Illinois; Andy Novakovic, Cornell University; Mark Stephenson, University of Wisconsin and Cameron Thraen, Ohio State University.
"Whether the programs proposed here will prove to be the answer farmers seek is something that will be debated and estimated, but we won’t really know unless and until they are tried," they say.
The programs could also be three times more expensive. The Congressional Budget Office (CBO) estimates the new dairy provisions will require a taxpayer "investment" of $912 during over the next 10 years. The CBO scored the previous MILC program and other dairy programs under the old farm bill at $284 million.
Although the new farm bill contains no dairy market stabilization program, it does establish a production base for each farm, which would be the highest milk production of 2011, 2012 or 2013. The base would then be adjusted by the percentage increase in national average milk production for each year moving forward.
Producers could elect to cover from 25% to 90% of their production base and insure margins (the difference between the all-milk price and total feed costs), ranging from $4 to $8 per cwt., in 50¢ increments.
Dairy operations could participate in either the margin insurance program or the dairy livestock gross margin program under the Federal Crop Insurance Act, but not both.
The new farm bill would end the 70-year-old dairy price support program (although it lies dormant in permanent farm law). The 2014 farm bill also establishes a Dairy Product Donation Program (DPDP), which would buy dairy products at prevailing market prices for donation to domestic feeding programs.
It would be triggered when the dairy margin has been $4 per cwt. or less for each of the immediately preceding two months. The bill has a number of triggers when the DPDP must end, including provisions to keep U.S. dairy commodity prices competitive on world markets.
The new bill also eliminates the Dairy Export Incentive Program but it renews the dairy forward contract program. This latter program allows proprietary plants to forward contract with dairy producers for Class II, III and IV milk without being subject to Federal Milk Market Order price minimums. Milk that is going into Class I could not be forward contracted.
While the farm act spells out all of these new provisions, exactly how they will be implemented will be determined in part by how USDA officials write the regulations. For example, sign-up deadlines and premium payment method decisions are being left up to the Secretary of Agriculture.
Dairy economists say it’s in everyone’s interest that the rules be written clearly and quickly. Dairy farmers will need some time to understand the new program.
How margins are calculated is spelled out in the statute. The U.S. all-milk price will be used as the milk price. To determine the income-over-feed-cost margin, a specific equation of corn, soybean meal and alfalfa will be subtracted from the all-milk price:
All-milk price minus the sum of 1.0728 X the price of corn, plus 0.00735 X the price of soybean meal, plus 0.0137 X the price of alfalfa hay.
Margins will be calculated monthly, but the triggering events will based on a two-month average of consecutive pairs of months: January/February, March/April and so forth. "No matter how grim a single month may get, if the two-month average doesn’t hit a trigger, there will be no payment," say the economists.
Premiums are set by production level. There is one set of premiums for the first 4 million pounds of annual production, and another, higher rate for production above 4 million pounds.
Larger farms will likely have their premiums pro-rated based on their total production history. For example, a farm with 6 million pounds of production per year that chooses to cover 50% of its history will be covering 3 million total pounds. Although it is less than 4 million pounds, the premium would be calculated as 2 million pounds at the lower rate and 1 million pounds at the higher rate.
The university economists list several possible issues and challenges with the new programs:
- Margin insurance premiums are set for five years and government subsidized. "If dairy farmers use the margin protection program heavily and stop participating in the Chicago Mercantile Exchange futures markets, those markets will lose valuable participants and liquidity that could threaten their viability."
- The program does not offer insurance coverage for expansion; production histories increase only at the rate of national milk production expansion. However, new farms can enter the program at any time.
So rather than expand incrementally, dairy farmers might choose to build new dairies. "The margin protection provisions may inadvertently result in a policy framework that gives advantage to ‘lumpy’ over ‘incremental’ growth at the farm level," says the economists.
- Culling during periods of cash flow challenges might be forestalled since the indemnity payments would presumably cover some (depending on coverage level) of the shortfall. "This is consistent with the whole point of the program, but the effect is to maintain milk production and potentially prolong the duration of law margin periods. This is no different than the effect of the MILC program," say the economists.