We now have a full year of the Margin Protection Program (MPP) behind us. As most of you know, this program replaced the Milk Income Loss Program (MILC) providing levels from $4.00 per cwt up to $8.00 per cwt at 50-cent increments that could be chosen to protect income over feed costs. If income over feed fell below a chosen level of protection, payment was rendered to make up the difference from the chosen level. This was farmer funded as each level of protection had a certain value associated with it that needed to be paid. You could say this was similar to a put option. However, it was a put option on income over feed and not one particular commodity. If income over feed fell below the chosen level, payment was received. If not, then the amount paid for that protection was absorbed by the program.
Some viewed this last year or currently view this as their marketing program. But should this be the case? The evidence indicates that this is a program for price enhancement like the MILC program was. The difference is that the MILC program was government funded while the MPP is farmer funded. The MILC program was not really viewed as a marketing program. Risk management was employed by many with little regard to what level an MILC payment would be rendered. It was considered, but the goal was to protect good milk prices and protect feed prices.
It can clearly be seen that MPP is not a good sole risk management strategy. Class III milk futures for 2015 could have been hedged at $17.00-$18.00 during the second half of 2014 providing great milk price protection. Put option strategies were very effective to establish floor prices. Milk prices fell to various levels in the $15.00-$16.00 range. Relying on a payment from MPP provided no price protection below the $7.50 level. Those few which chose the $8.00 level received payments for 3 of the 6 pay periods not even covering the cost of the program for the year. Milk prices declined while at the same time feed price used in the calculation of the income over feed cost for MPP declined as well. In fact, the strongest income over feed prices were seen during the last four months of the year. The income over feed price for September was $8.95; October was $9.22; November was $10.02; and December was $9.10.
Milk futures contracts for 2016 in the last quarter of 2015 were in the $16.00-$17.00 range for various contracts and those who used MPP as their risk management program have again seen milk prices erode to unprofitable levels in many cases. Current prices are about $2.00 under those levels and there still are no payments under MPP. There is plenty of the year left during which income over feed levels could change dramatically, but it sure does not look like this should again be looked at as the sole marketing program. USDA indicates many are disillusioned with the program as 77% of the dairy farms signed up for MPP have chosen the $4.00 level this year.
Much income has been given up by not utilizing risk management strategies and current indications point to a prolonged period of low milk prices. The bottom line is that MPP is not designed as a marketing program. It is designed to protect income over feed. It does necessarily protect farm profitability. Opportunities to protect good prices through the use of milk option strategies may be difficult to find at current levels, but any opportunity needs to be grasped. Push the pencil and do not rely on a government program.
-Global Dairy Trade auction on February 2
-December Dairy Products report on February 3
-January Federal Order class prices on February 3
-World Agricultural Supply and Demand report on February 9
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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