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RSS By: Jim Dickrell, Dairy Today

Jim Dickrell is the editor of Dairy Today and is based in Monticello, Minn.

Better Than MILC?

Jun 17, 2011

The first question producers rightly ask: Would I be better off under current dairy policy or under the Foundation for the Future plan?

 

Here in the Midwest, elimination of Milk Income Loss Contract (MILC) payments has been perhaps the biggest obstacle to acceptance of the National Milk Producer Federation’s “Foundation for the Future” (FFTF) plan.

In MILC’s place, FFTF would establish margin protection insurance for catastrophic losses when income over feed costs drop below $4/cwt. The program would also allow producers to buy additional government-subsidized insurance (with the subsidy decreasing as protection levels increase).  

The first question producers rightly ask: Would I be better off under current dairy policy or under FFTF?

Economic modeling, done by economists at the University of Wisconsin and Cal Poly, suggests FFTF would be the slightly better option. Under the model, mid-sized dairy operations with 183 cows would net $5,490 more per year under FFTF. This is despite the fact that the farm would receive no MILC payments.  

Part of the reason for increased income: “For the period of 2013-2018, the average All-Milk price would be increased 17¢/cwt. under FFTF,” says Mark Stephenson, director of the Center for Dairy Policy at the University of Wisconsin. (The other reason for increased income is that milk per cow is assumed to continue to grow 2% annually, diluting out maintenance feed costs.)  

Over the decade, that’s $55,000 more income over feed costs (IOFC). It’s not a huge amount, given that this same dairy will have $4 million in IOFC for the decade. But it is positive, and it is better than the current program. 

Midwest producers would fare slightly better because Class III cheese prices would be higher under FFTF. The reason is that during those times when IOFC fell below $6/cwt. for two consecutive months, FFTF’s Dairy Market Stabilization Program would be activated. Money collected from production penalties would be used to buy cheese off the market, thus increasing cheese prices.  

Most producers who compare the current MILC program and FFTF compare MILC to the margin insurance protection component. On its face, that is a reasonable comparison because even National Milk says FFTF uses margin insurance to replace MILC. But in reality, you have to look at the program in its entirety to get to the bottom line. That’s not easy—it takes sophisticated multi-variant economic modeling to do it. The back of an envelope won’t do it, or even partial budgeting that compares MILC to margin insurance.  

The other problem is that once in place, the benefits of FFTF might be difficult to document. A 17¢/cwt. All-Milk price bump is going to be very difficult to pick up in the milk check.  

Think about the 15¢/cwt. dairy checkoff. Year in and year out, economic models show a huge return on investment benefit. For example, in 2008, USDA estimated that for every $1 invested in generic marketing, dairy farmers received a net of $5.49 to $7.07.  Some producers, however, are absolutely convinced the dairy checkoff does them no good. 

In the end, dairy producers will have to decide if FFTF provides a better way forward than status quo. The first step in making that decision is to understand what’s in the program. Our June/July issue devotes about 80% of the magazine to FFTF—what it is, what it can and cannot do, what economists and producers think of it, who’s supporting it and who isn’t. Click here for our June/July digital edition.     

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