Basis Critical To Getting the MPP Right

September 4, 2014 05:59 AM
Basis Critical To Getting the MPP Right

Your farm’s margins could differ greatly from national calculations.

USDA-Farm Service Agency’s new Margin Protection Program should be easy enough for producers to sign up for, but there are details that they need to pay attention to, says Mary Ledman, dairy economist with the Daily Dairy Report and president of Keough Ledman Associates Inc., Libertyville, Ill. And one of the most crucial of all details is how the margin is calculated.

"It is important for dairy producers to understand that the margin is the difference between the national average all-milk price and national average feed costs—not their actual margins," says Ledman. "Thus, producers must understand their basis risk—their actual milk price and feed costs compared to those used in the calculation."

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Near the end of each month, USDA-NASS reports a national average all-milk price for the prior month and a preliminary estimate for the current month. In the Aug. 28 Agricultural Prices report, NASS released the final all-milk price for July at $23.30. National average feed prices were released in the same report.

Average vs. reality

Ledman points out that these national average prices differ greatly from what producers actually receive for milk and pay for feed. For example, she says, the U.S. all-milk price for July of $23.30 at 3.61% butterfat compares to California’s all-milk price of $21.70 at 3.58% butterfat, which was $1.60 less than the national price.

"Every penny change in the milk price changes the margin by an equal amount," says Ledman.

Likewise, July’s U.S. average all-alfalfa price was $216/ton, while California’s all-alfalfa price was $59 higher at $275/ton.

"Every $10 change in the alfalfa price changes the margin by nearly 14 cents," she says. "Therefore, in July California producers had a negative 82-cent basis due solely to California’s higher alfalfa costs." Add that to the $1.60 difference between milk prices and California’s margin was $2.42 less than the national average in July.

Since 2010, California’s all-milk price has averaged $1.65 less than the national all-milk price. During the same period, California’s alfalfa price has averaged $21/ton more than the national average.

"While the current $59 difference between the national average alfalfa price and the California alfalfa price is driven in part by the California drought, it’s still fair to say that a $6.50 national average margin is more like an actual $4/cwt. margin for a California dairy," she concludes.

Nevertheless, a program benefit is paid when the margin between the all-milk price and national average feed costs is less than the level of coverage selected in any one of the six consecutive two-month periods. For example, Ledman says, if the final margin for the January-February period announced at the end of March is $3.50, producers selecting the $4/cwt. base coverage will receive 50 cents per hundredweight on one-sixth, or two months, of the volume of milk covered.

Producers can chose to protect between 25 percent and 90 percent of their annual production history, but they must select the same coverage level for all milk covered. In 2014 and 2015, premiums are discounted by 25 percent on the first 4 million pounds of milk covered, and producers can pay their premiums at sign up, or pay 25 percent by Feb. 1 with the remaining 75 percent paid by June 1.

Ledman notes that one detail not to overlook is that to be eligible for the program, producers must meet the requirements for the conservation program and have a current AD-1026 form on file with USDA’s Farm Service Agency.

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