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The Farm CPA

RSS By: Paul Neiffer, Top Producer

Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.

Margin Protection for Dairy Producers

Feb 10, 2014

Dairy farmers are now starting to enjoy healthy margins after several years of either breakeven or loss margins. The new farm bill provides margin protection for dairy farmers. This margin protection is calculated based on the difference between the "all-milk price" and average feed cost. Average feed cost is calculated as the sum of the price for:

  • 1.0728 bushels of corn, plus
  • .00735 of a ton of soybean meal, plus
  • .0137 of a ton of alfalfa hay

Therefore, if corn is trading for $4.50 per bushel, soybean meal is trading at $400 per ton and alfalfa hay is trading at $220 per ton, the components would be as follows:

  • Corn $4.83
  • Soybean meal $2.94
  • Alfalfa $3.01

Adding these three components together, we get an average feed price of $10.78. The margin that a dairy farmer can lock in is between $4 and $8 per cwt. In our example, if the all-milk price is greater than $18.78, there would be no payment to the dairy farmer. If the price is between $14.78 and $18.78, there may be a margin payment depending on the coverage level elected.

The farmer may make an annual election to obtain margin protection in increments of 50 cents. If they elect $4 margin protection, there is no premium owed. Between $4.50 and $8 of margin protection, a sliding scale premium will be owed on an annual basis as follows:

Producer Premiums

 

Less Than

More Than

 
 

4 Millions Lbs

4 Millions Lbs

 

Coverage

Premium

Premium

Percentage

Level

Per Cwt.

Per Cwt.

Difference

       

$ 4.00

None

None

 

$ 4.50

$ 0.010

$ 0.020

100%

$ 5.00

$ 0.025

$ 0.040

60%

$ 5.50

$ 0.040

$ 0.100

150%

$ 6.00

$ 0.055

$ 0.155

182%

$ 6.50

$ 0.090

$ 0.290

222%

$ 7.00

$ 0.217

$ 0.830

282%

$ 7.50

$ 0.300

$ 1.060

253%

$ 8.00

$ 0.475

$ 1.360

186%

The farmer can elect coverage between 25% and 90% of production with the premium being adjusted accordingly. The program is scheduled to start September 1, 2014 and a program payment will be made based upon the average margin during a two month period. The periods are Jan/Feb, Mar/Apr, May/Jun, Jul/Aug, Sep/Oct, and Nov/Dec. If the average margin for any of these two months falls below the coverage level elected by the farmer, then a payment will be made based upon his level of coverage and production history.

This is a brief summary of the new dairy margin program which will replace all of the current dairy programs. For large producers, it may not make sense to elect $8 coverage on an annual basis when the farm is locking in $4 of protection at a $1.36 cost. However, at the $6 level, the cost is now $.155 per year for an extra $2 of coverage. A farmer will need to run their numbers and see which coverage makes the most sense. Unlike ARC or PLC where the farmer is locked in for all five years (2014-2018), the dairy margin program allows farmers to change their mind each year.

We will keep you posted.

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