How margin protection, market stabilization play out
If the Foundation for the Future policy proposal had been in place in 2011, U.S. dairy producers would have seen the plan’s Dairy Producer Margin Protection Program (DPMPP) and Dairy Market Stabilization Program (DMSP) kick into operation.
"There would have been incentive under the DMSP to cut milk production in March, April and May," says Rob Vandenheuvel, general manager of the California-based Milk Producers Council.
Both the DPMPP and DMSP "heavily rely on a monthly margin calculation," Vandenheuvel says. That margin is determined by:
- the U.S. All-Milk Price, which USDA publishes monthly; and
- the national average feed cost, based on a formula that includes corn, soybean meal and alfalfa values.
"The difference each month between these two figures is the monthly margin," Vandenheuvel says.
For April 2011, he calculates the margin at $5.59 per cwt., based on:
- April’s announced All-Milk price was at $19.70 per cwt.; and
- the national average feed cost of $14.21 per cwt. (Both the corn and soybean meal prices are determined as the average of the daily settlement prices during any month for the nearest month CBOT futures contract. In April 2011, the average settlement price for corn’s May 2011 contract was $7.53 per bu., and for soybean meal, $352.19 per ton. The alfalfa price is taken from the monthly USDA report. The announced April 2011 price received by U.S. alfalfa farmers was $155 per ton.)
Margin calculation would play a major role in determining whether the DMSP, sometimes referred to as supply management, gets implemented.
"The DMSP is designed to temporarily send a signal for producers to cut back milk production when the industry experiences low margins," Vandenheuvel says.
DMSP would activate if the "margin" falls below the trigger margin for two consecutive months. Once the program is triggered, a temporary "base" is established for each dairy. That base is either a rolling three-month average of the most recent milk marketing prior to DMSP implementation or the same month in the previous year.
DMSP would remain in effect until the margins rise above $6/cwt. for two consecutive months. Then it would end, and the base would be extinguished.
"Monies paid by handlers for milk produced in excess of these levels will go into a fund to be managed by a producer board and used to stimulate the consumption of dairy products," Vandenheuvel says.
One caveat: If U.S. prices for cheddar cheese or skim milk powder rise 20% above world prices for the applicable commodity for two consecutive months after DMSP has been implemented, the program would be discontinued unless the national average margin falls below $4.
If approved, DPMPP would replace both the Milk Income Loss Contract (MILC) and the Dairy Product Price Support Program.
"In their place, the DPMPP establishes a voluntary two-level system of margin protection: base coverage and supplemental coverage," Vandenheuvel says.
Producers would have the option of signing up for either the base coverage or base plus supplemental coverage. The base coverage would be free, while supplemental coverage would have an annual premium.
Each dairy’s coverage would be based on its production history. Base coverage would provide direct payments to producers when monthly margins drop below $4 per cwt.
"In the past five years, the base coverage would have made payments in eight of the 60 months, all in 2009," Vandenheuvel says.
Supplemental coverage would apply to dairies that want greater than the $4 per cwt. margin protection. It would provide direct payments when monthly margins drop below their selected margin level.
Vandenheuvel offers this DPMPP example: Take a 1,000-cow dairy where production totals 22,000 lb. per cow, giving it a 22-million-pound production history. The dairy signs up for free base coverage of $4 per cwt. plus $2 in additional coverage on 90% of its production history. The annual premium rate would be $0.155 per cwt., or $30,690 a year, payable by Jan. 15 of each year.
The 2011 payout for January to April in this example would be zero on the base coverage and $49,288 on the supplemental coverage.