Margin Insurance for Dairies

November 17, 2010 05:31 AM
 
Margin Insurance for Dairies

National Milk Producers Federation’s proposed dairy policy is tied to IOFC margin rather than milk price.

 

In the most radical departure in dairy policy since the dairy price support program began in 1949, the National Milk Producers Federation (NMPF) is omitting minimum dairy prices from its Foundation for the Future plan. In their place, the plan calls for margin insurance—a minimal level of protection for all producers at no cost and with no herd size limits.

“The plan is designed to protect farmers when milk prices are low, feed prices are high or if markets collapse,” says Jerry Kozak, president and CEO of NMPF.

The plan covers 90% of each producer’s base milk production when margins fall below a certain level. The idea is to protect income over feed costs (IOFC) rather than have payments kick in only when milk prices fall.

 

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Kozak notes that Milk Income Loss Contract (MILC) payments, which are triggered by milk price (with a minimal feed cost adjustor), often kick in when they aren’t really needed and often don’t provide much assistance when they are needed.

 

Case in point: In 2002, the average IOFC margin was $6.50/cwt. But because of low milk prices, USDA doled out $1,041,984,000 in MILC payments. In 2009, when milk prices tanked and feed costs rocketed, the IOFC margin was $3.88. Yet USDA sent out only $855,360,000 in MILC payments.

The major difficulty in discussing the plan is that the levels of protection and cost of supplemental insurance depend on how the Congressional Budget Office scores the proposal. Government outlays to subsidize this insurance cannot exceed the baseline expenditures of the 2008 farm bill.

NMPF economists assume the base program would establish a minimum of a $4 IOFC margin. In the past decade, the average margin has been $8. Only once, in 2009, has the margin fallen below $4, and it remained there for eight months, from January through August.

Dairy producers would also be allowed to purchase additional margin protection. NMPF projects premiums of 3.6¢/cwt. for $1 of supplemental coverage ($5 margin), 15.5¢/cwt. for $2 of supplemental coverage ($6 margin) and 92¢/cwt. for $4 of supplemental coverage ($8 margin). Premiums would be fixed for the life of the farm bill and due as a lump sum each year.

Here’s the math for a 200-cow herd that produces 20,500 lb. of milk per cow, assuming a base for the farm of 4.1 million pounds:

The $2 supplemental coverage would cost 15.5¢/cwt. or $5,569 annually. If the margin fell below $6, the producer would receive $55,274 in margin insurance. (In the past decade, the margin fell below $6 in 22 of 120 months.) If the conditions of 2009 reoccurred and the actual margin fell below $4, the producer would receive an additional $29,097.

NMPF economists estimate this is a $2.08/cwt. return for a 15.5¢/cwt. premium. “That’s a pretty good deal and offers better protection than MILC,” Kozak says.

 

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