Falling Margins Could Trigger New Safety Net Program

Falling Margins Could Trigger New Safety Net Program

A few months ago, it looked like profit margins for U.S. dairy farms would remain well above coverage levels in the new Margin Protection Program (MPP). However, plunging milk prices in early 2015 could push the margin below MPP’s top coverage level in January.

It’s still uncertain, however, whether the margin would remain low enough in February to actually trigger payments, which are based on two-month periods, according to Mary Ledman, dairy economist with the Daily Dairy Report and president of Keough Ledman Associates Inc., Libertyville, Ill.

USDA recently released preliminary state‐level MPP enrollment numbers for 2015. Fifty-one percent of licensed herds in the United States, or 23,809 farms, enrolled in the program, which is about one-third fewer farms than the 35,411 dairy farms that participated in the Milk Income Loss Contract (MILC) program in fiscal year 2013. The last time the MILC program was triggered was in January 2013, when the payment was 12 cents per cwt. of milk. Of the dairy farms participating in the new MPP program, only 55 percent, or 13,090 farms, chose a coverage level higher than the minimum margin, or base coverage, of $4/cwt. of milk.

According to Ledman, the November-December MPP margin was $12.03/cwt. based on corn, alfalfa, and milk price data recently published in in USDA’s Agricultural Prices report and USDA’s monthly average Decatur-Central Illinois rail soybean meal prices. While the November-December 2014 margin was 22 percent less than the previous bimonthly calculation, it was still well above the maximum coverage level that producers could buy of $8/cwt. of milk. Payments are made when margins fall below $4/cwt. or when the margin is less than the coverage level selected by the producer.     

“In previous years, producers would have had a preview of January’s MPP margin from data published in the late-January Agricultural Prices report,” notes Ledman. “However, effective January 2015, USDA discontinued publishing its preliminary monthly commodity prices, noting that for many commodities, preliminary price data do not represent current producer marketing strategies or actual sales.”  

Looking at December’s margin alone shows it was $10.66, according to Ledman. December’s margin was derived from an All-Milk price of $20.40 and a national average corn price of $3.78 per bushel, an average U.S. alfalfa price of $183 per ton, and a soybean meal price of nearly $432 per ton.

January Milk Prices Tumble

January milk prices have dropped significantly from December levels. The January Class I mover fell $3.95 to $18.58. The Class III price fell $1.64 to $16.18, and the Class IV price slipped $3.47 to $13.23.

“Further milk price erosion and stable to higher feed costs in February could result in a MPP margin near the maximum $8/cwt. coverage, but producers won’t know whether there will be a payment until the March 30 Agricultural Prices report,” says Ledman.

Ledman is concerned milk prices could continue to fall, before bottoming out in the second quarter. “There will be a slowdown in production in New Zealand and most likely Europe,” she says. “But it is the U.S. flush that I’m concerned about. I’m not convinced there's going to be a slowdown, particularly east of the Rockies.”

In addition to a robust spring flush, a stronger dollar will challenge the United States’ export competitiveness compared with that of the Europeans, she adds.

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