Some dairy analysts and journalists have worried that the Dairy Margin Protection Program (MPP) may be less attractive out west because feed costs are higher and milk prices are lower than average U.S. feed prices and the all-milk price. These basis differences therefore make the MPP less effective, if not out-right useless, so go the concerns.
Not so fast, argues Marin Bozic, a University of Minnesota dairy economist. “You cannot infer much about MPP-Dairy effectiveness just by looking at the basis. What MPP-Dairy margin is needed depends on other (i.e. non-feed) operating costs, and other operating costs are lower in the West, due to economies of scale and weather conditions,” he says.
Using a data set of dairy costs from the accounting firms Genske & Mulder and Van Bruggen & Vande Vegte, Bozic went back and calculated what margins would have been in 2009, when milk prices crashed. He assumed a margin protection level of $6.50/cwt for all farms and 90% coverage of production history. When he ran the numbers, the net returns after premiums were paid was $1.73/cwt of total production.
Did that $1.73 cover all losses incurred in 2009? No. But it did cover a chunk: 71% in the Midwest, 55% in Texas, 44% in Idaho and 53% in California.
In other words, dairy farmers in each of these states still incurred losses during times of catastrophic margins. But they were still better off taking out the insurance than not doing so. Even in the worst case, Idaho, farmers would have lost about $2.25/cwt, but not the $4 they would have lost without MPP insurance. In California, farmers would have lost more than $3/cwt without insurance but about $1.50 with it.
Click here to listen to a podcast presented by Bozic on the MPP.