Dairy Talk: Calculate Your Margin Protection Program Benefits

 
Dairy Talk: Calculate Your Margin Protection Program Benefits

The dairy industry debated the 2014 farm bill for four long, divisive years. Now that we have the details, it’s time to quit arguing and start analyzing whether the Dairy Margin Protection Program (MPP) makes sense for your dairy.

We’ve provided a lot of detail on the MPP in our cover story, “Dairy’s New Deal” starting on page 8. We’ve also provided a chart showing insurance premiums for the various levels of margin protection, ranging from 
$4 to $8 per cwt.

This is just the start. As a dairy farmer now free to choose timing, coverage level and amount of coverage, it’s up to you to make the decision that’s right for your operation, financial position and risk tolerance.

Done right, this won’t be easy. As Mary Ledman points out in “Basis Critical to Getting MPP right,” page 10, each farm has its own basis—the difference between on-farm and national prices. In California, for example, milk prices typically are $1.50 to $2/cwt less than the national all-milk price. Feed prices are often higher.

So to lock in a $4/cwt catastrophic margin, California producers might actually have to purchase $6 or $6.50 margin insurance. For a California producer with a 10 million pound production history, protecting 75%, means he might have to spend 17¢/cwt for $6.50 margin insurance for essentially a $4/cwt national margin. A Midwest producer, whose milk and feed basis would likely be closer to zero, would get the 
$4/cwt catastrophic coverage for just the $100 administrative fee.

That’s probably not fair, but calculating premiums on a regional basis was a political quagmire. So the national price model is what producers will have to live with. The message, again, is that every farm must do its own calculation. 

Many farmers, if they decide to participate, might simply look at the premium chart and select the $6.50 margin. That’s the point of the price break, with premiums taking significant jumps at the $7 margin.

In 2014 and 2015, the premium at $6.50 is 6.8¢ and jumps to 16.3¢ at $7 for coverage up to 4 million pounds. Above 4 million pounds, the premium jumps from 29¢ to 83¢. 

But large operations, those with more than 4 million pounds of production history, must remember they qualify for the lower premiums on the first 4 million pounds of coverage. So that dilutes, to some degree, the huge premium jumps above 4 million pounds. 

The National Milk Producers Federation has provided a spreadsheet for calculating such scenarios. You can access the tool at http://www.futurefordairy.com/mpp-calculator. Farmers can input their production history and select coverage levels and percentages. It then estimates net benefits.

No spreadsheet can predict the future with absolute certainty. But it is far better than shooting in the dark. Use it, and you and your lender will likely sleep better.

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