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Homework Required to Calculate Farm Bill Dairy Benefits

17:59PM Oct 06, 2014

Spreadsheets and calculators are available to help you decide whether the Dairy Margin Protection Program makes sense for your operation.

Now that we have the details of the dairy Margin Protection Program, it’s time to start analyzing whether the Dairy Margin Protection Program makes sense for your operation.

You have multiple decisions to make:
• Whether you’ll participate.
• When to participate.
• Amount of production history to cover.
• Margin level to insure.

Done right, this won’t be easy. As the Dairy Dairy Report’s Mary Ledman points out, 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 national all-milk prices. 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 lb. production history who wants to protect 75%, that means he might have to spend 17¢/cwt. for $6.50 margin insurance for essentially a $4/cwt. national margin. A Midwest producer with a milk and feed basis closer to zero, would get $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 that they qualify for the lower premiums on the first 4 million pounds of coverage. So that dilutes out, to some degree, the huge premium jumps above 4 million pounds.

The National Milk Producers Federation has provided a spreadsheet for calculating such scenarios. 

Farmers can use their own costs and milk prices. The calculator then allows farmers to 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 that shooting in the dark.

Use it, and you will likely sleep better.