Dairy Talk: The Status Quo Isn't

October 4, 2011 05:43 AM
 

Jim DickrellThe proposed changes to Foundation for the Future (FFTF) fundamentally change the scope of the program.

Rather than mandating that every dairy be subject to the dairy market stabilization portion of the program, participation would be contingent on signing up for the margin insurance portion. If you don’t opt in for margin insurance, you’re not subject to supply controls.

Some say this will gut the program, with few producers opting in. But National Milk Producers Federation (NMPF) officials say many will—perhaps 60% of the milk supply.

The reason: FFTF does away with the Dairy Price Support program and the Milk Income Loss Contract (MILC) program. Without those programs, producers will likely have to do their own risk management planning anyway, and FFTF offers a low-cost way of doing so. Plus, lenders of highly leveraged operations will likely insist on it.

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Some producers would prefer the status quo, particularly retaining the MILC program. But Jerry Kozak, CEO and president of NMPF, offers some startling statistics.

Since MILC’s inception in 2001, some 36,000 dairy producers have gone out of business. Ninety-seven percent of those producers had fewer than 200 cows; 100% had fewer than 500 cows. MILC, targeted at those smaller operations, clearly was not saving those farms.

In addition, MILC is already scheduled for budget cutbacks. Rather than paying 45% of the difference between the Class I price in Boston and $16.94 (adjusted for feed prices), the payment rate drops to 34% on Sept. 1, 2012. Finally, the feed cost adjuster is scheduled to increase from $7.35 per cwt. of feed to $9.50.

These changes will make a huge difference in MILC payments. I ran a quick simulation for the last four months of 2012 based on current feed and dairy futures prices. MILC payments were in the $1.85 to $1.90 per cwt. range using the current formula. But when I used a payout factor of 34% and a feed cost adjuster of $9.50, none of the MILC payments exceeded 20¢ per cwt.

Bottom line: The status quo isn’t the status quo. And FFTF offers the better safety net.

 

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