With the sign-up period closed as of November 20 for the 2016 milk Margin Protection Program (MPP), its time to take a look at how the sign-up went and whether next year’s payout will be better than this year’s.
The MPP program—designed to safeguard milk production margins—is the federal insurance program for U.S. dairy producers. According to a recent USDA press release, as of November 9, almost half of all U.S. dairy farms had enrolled in the program for 2016, which included making their annual election coverage for 2016.
“This implies that more than half of U.S. dairy producers had still not enrolled despite a USDA extension provided in September,” says Sara Dorland, analyst with the Daily Dairy Report and managing partner at Ceres Dairy Risk Management, Seattle. “On a bright note, though, for 2016, producers had the option to increase their pounds of milk covered by 2.61 percent above their farm’s historical production level.”
In 2015, the MPP program paid very little to producers. Only producers who opted for the two highest margin indemnification levels of $7.50 and $8/cwt. received payments, and less than 9 percent of dairy operations electing 2015 coverage chose levels between $7 and $8 in 2015.
“Given September’s MMP milk margin calculation of $8.94909/cwt., it would take an October margin near $7.05 to reach an $8/cwt. average margin for the fifth two-month reporting period of 2015,” notes Dorland.
Dorland notes that this year’s performance of the program likely weighed on dairy producers’ decisions as to whether they should sign up for the 2016 program and whether to insure a margin above the free $4/cwt. level provided by the government.
“If this year’s sign-up is any indication of the 2016 program, just over half of dairy operations will ultimately sign up, and of those, 44 percent will elect the $4/cwt. coverage level,” she adds.
Looking ahead to 2016, the payout won’t be much better than 2015, says Dorland. Her calculations show that both milk and feed prices are expected to be lower in 2016, based on an average of CME Group Class III futures prices plus 75 cents per hundredweight to come up with a projected 2016 All-Milk price of $16.60, corn and soybean meal futures prices, and a price of $175/ton for alfalfa.
“All in all, the data indicates that similar to this year, 2016 would only pay out in the first half of the year for those insured above the $8 level,” Dorland notes. “Given a cost of 47.5 cents per hundredweight for operations producing less than 4 million pounds of milk and $1.36 for those with more than 4 million pounds, the price to participate seems rather high compared to the potential payout of 47 cents for the first half of the year and no payout in the second half. While today’s futures prices are no guarantee of future performance, they are clearly one of the tools dairy producers use to project margins.”