There has been much discussion about the Margin Protection Program for 2016. Quite a bit of what has been written has been indicating many have been disillusioned with the program due to payouts to date going only to those who have chosen the $8.00 level and those payments not enough to cover the cost of the program at that level as of yet. Many have indicated the desire to settle for the basic $4.00 level next year at a cost of $100 instead of paying a higher premium for a higher level. The important thing to keep in mind here is that one should not hope to make money from this program, but use it for what it is and that is to protect a margin.
I realize this may be easier said by those who look at the program from a technical standpoint. Most farmers may look at it as money that has been spent with no return and yet profitability is tight or non-existent. The feeling is that that money would have been better spent on something else. Yes, hindsight is always 20/20.
If you can recall during many of the meetings last year during which charts were displayed as well as websites showing similar charts had projections showing a very limited possibility of payment for 2015. However, charts that showed historical income over feed prices over a long period painted the picture of a higher possibility of payouts. One had to choose a level based on market outlook and affordability. Many chose the $4.00 level is order to get into the program and take advantage of the yearly bump in milk production for the program in 2016. The increase of milk production for the farms in the program will be 2.61%.
Now the decision will need to be made by November 20th as to the level of choice for 2016. This choice should not be made based on the experience this year, but must be made on what income over feed level needs to be protected next year. It was much easier when the government set the MILC level and payments were received bases on the calculation of milk prices. The only decision needed to be made was what month to choose to begin receiving the payments. Now a decision is required by farmers and that changes it dramatically as levels and amount of production needs to be determined.
Current market fundamentals may suggest little change in milk prices the rest of this year, but the potential for lower milk prices and possibly steady feed prices is very real. Grain harvesting is well on its way to completion with prices appearing to be supported near current levels. However, it may be a different story for milk. Once demand slows after the end of the year and if exports continue to languish, supply could back up quickly. If supply grows more quickly than demand, lower prices will be needed to either curtail milk supply or to increase demand. That is where the income over feed price could tighten significantly. So the bottom line is that I believe this is not the year to pull back and settle for the $4.00 level, but to increase the level of margin coverage to the highest you feel will meet your goals.
This program needs to be used as a marketing tool that is available for income protection, but should not be the only tool used for risk management. Milk price could fall along with feed prices and still no payments rendered. Feed prices could rise and milk prices remain could decline allowing for a payment, but yet not protecting milk income. The goal is to look at your operation as a whole and develop a plan to protect your business. Work with someone that can help you achieve your goals and help you initiate a plan so you can concentrate on your business.
-September Agricultural Prices report on October 29
-September Dairy Products report on November 3
-World Agricultural Supply and Demand report on November 10
Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their website at www.agdairy.com.
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