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Dairy safety net: Some help arrives, some questions remain

Progressive Dairyman Editor Dave Natzke Published on 13 February 2018

The heavy lifting on dairy safety net reforms – which many were targeting for the 2018 Farm Bill – got some advance help when program changes were inserted in a federal budget bill approved by Congress last week. The changes kick-start dairy farmer income protection this year, but there are still questions left to answer.

Adjustments to the Margin Protection for Dairy (MPP-Dairy) and Livestock Gross Margin for Dairy (LGM-Dairy) programs were included in the budget bill signed into law by President Donald Trump on Feb. 9. National Milk Producers Federation (NMPF) President and CEO Jim Mulhern said the reforms are “much-needed improvements to the dairy safety net” at a time when many dairy farmers are struggling financially after a third year of stagnant prices.

2018 enrollment to reopen

While the budget bill reopens MPP-Dairy 2018 sign-up, several details remain to be worked out. The sign-up period will be for 90 days, but exact dates have not yet been announced.

As of Feb. 13, Wayne Maloney, in the USDA Farm Service Agency (FSA) public affairs office, said FSA staff were finalizing enrollment details and preparing a fact sheet concerning the new MPP-Dairy provisions.

Timing could be critical: Based on current projections, lowest milk income margins will be in February through May 2018.

Remaining questions include whether coverage is effective immediately upon sign-up; whether buy-up coverage will be available retroactive to January or only going forward; and whether the reduced premiums will be for the full 12 months of 2018 or prorated starting at some point in February. (Watch the Progressive Dairyman website or check with your local FSA office for details as they become available.)

Farmers who enrolled before the Dec. 15, 2017, deadline will be allowed to change coverage levels. And, producers who previously opted out of the program for 2018 may get back in.

NMPF has also asked USDA to make a special provision for farmers who may have opted out of MPP-Dairy and purchased LGM-Dairy policies. The current farm bill does not allow farmers to participate in both programs.

“Therefore, we ask that you give producers one-time flexibility to terminate their LGM contracts” if they wish to utilize the revised MPP in 2018, Mulhern wrote in a letter to U.S. Ag Secretary Sonny Perdue on Feb. 13.

MPP-Dairy: Affordability

The biggest changes to MPP-Dairy focus on dairy farmer affordability. Premiums on Tier 1 protection levels have been reduced about 70 percent from previous levels (see Table 1), giving producers the opportunity to buy coverage at higher margin levels at lower costs. For example, a producer buying margin coverage of $6.50 per hundredweight (cwt) under the previous premium schedule can now purchase margin coverage at the $7.50 per cwt level for a similar cost. Producers who previously purchased $8 per cwt margin protection can now get the same coverage at less than one-third the cost.

The milk production level under Tier 1 has also been raised, so producers will be able to cover margins on more milk in 2018. The previous Tier 1 coverage level cutoff was 4 million pounds of annual milk production. Under the revisions, all producers will be able to purchase protection at Tier 1 premium levels on 5 million pounds of milk in 2018. Based on the 2017 U.S. production average of 23,000 pounds of milk per cow per year, that would be equivalent to the annual output of 217 cows.

021218 natzke mpp dairy 

LGM-Dairy: Accessibility

Among things that haven’t changed in MPP-Dairy, however, are Tier 2 premiums. That means larger dairy producers will not see margin protection cost reductions on milk production in excess of 5 million pounds.

If the budget bill’s changes to dairy safety net provisions had ended there, they would offer little benefit to larger dairy producers, said Geoff Vanden Heuvel, board member and economics consultant with California’s Milk Producers Council. At current levels, Tier 2 premiums remain cost-prohibitive.

Accompanying MPP-Dairy changes, however, the budget bill also lifted the cap of $20 million for federal funding of USDA’s Risk Management Agency Livestock Gross Margin (LGM) programs, including a separate program for milk producers, LGM-Dairy. That cap has effectively limited sales of LGM-Dairy policies in some fiscal years.

“With the elimination of the $20 million cost cap in the budget bill, a dairy revenue crop insurance program becomes a viable and potentially very valuable risk management tool for all dairy farmers,” Vanden Heuvel said.

This may also allow the USDA to develop a wider variety of additional risk management tools to complement MPP-Dairy and LGM-Dairy. One program currently working its way through the approval process is the American Farm Bureau Federation (AFBF)/American Farm Bureau Insurance Services (AFBIS) proposal for a Dairy-Revenue Protection (Dairy-RP) policy. Similar to crop revenue protection policies, Dairy-RP would protect against unexpected declines in milk prices, unexpected declines in milk production, or both.

According to John Newton, director of AFBF’s Market Intelligence, the Federal Crop Insurance Corporation (FCIC) board was scheduled to consider the program at its February board meeting on Feb. 13. If approved, policies could be available later this summer.

“Taken together, these changes will provide important risk management tools for dairy farm operations of all sizes,” Mulhern said. 

Other provisions

Other changes to MPP-Dairy modify the timing of the margin calculation from every two months to every month.

In addition to the provisions outlined above, changes to MPP-Dairy also waive the $100 annual administrative fee for beginning, young and underserved farmers, and veterans.

What’s ahead?

While the heavy lifting on safety net provisions would seem to reduce the dairy workload in the 2018 Farm Bill, some adjustments remain possible, although all are not probable.

The added resources established by the fixes to MPP-Dairy and LGM-Dairy “help pave the way for final adjustments to the dairy safety net for the next five years as Congress crafts a new farm bill,” Mulhern said.

“We are going to continue working with Congress to find ways to improve the MPP as the next farm bill is formulated – which hopefully will be this year – consistent with our general outline for what will make it more effective,” said Chris Galen, NMPF senior vice president of communications.

The budget bill revisions did not change the feed cost adjuster used in MPP-Dairy calculations. Those calculations – implemented at the last minute by Congress in the 2014 Farm Bill – have been a major criticism of the program. Those critics charge current formulas do not reflect true feed costs, artificially increasing reported margins and keeping them above indemnity payment triggers.

In testimony before the House Agriculture Committee in March 2017, Mulhern said restoring the feed cost formula to its original form was a priority in the 2018 Farm Bill. (Read: What’s in it for you? Dairy producer, processor groups outline policy priorities.)

However, that change seems to have run into a budget road block, with the Congressional Budget Office scoring placing too high of a cost to the federal budget.

Speaking at a FarmFirst Dairy Cooperative annual meeting, Feb. 10, in Oshkosh, Wisconsin, Shawna Morris, NMPF vice president of trade policy, said one means to address the margin discrepancy might be to seek to raise the top margin level eligible for buy-up protection, from the current $8 per cwt, to $9 per cwt.

Based on program history, MPP-Dairy margins dipped below $9 per cwt during nine months in 2015 and eight months in 2016, but only two months in 2017.

However, as of Feb. 9, the Program on Dairy Markets and Policy estimates MPP-Dairy margins will be below $9 per cwt for much of the year, falling near $8 per cwt in February, June and July, and near $7 per cwt or lower in March-May 2018.

Another criticism is that MPP-Dairy’s use of national averages for feed costs do not reflect regional feed costs differences.

In his presentation to the House Ag Committee last March, Mulhern said recommendations to obtain more precise feed cost data included using corn prices compiled by USDA’s Agricultural Marketing Service (AMS), which calculates the corn purchase prices paid by farmers, instead of the USDA National Ag Statistics Service (NASS) monthly data which reports prices paid to corn producers at the first point of sale. The NMPF also recommended using average soybean meal prices collected by AMS at multiple locations throughout the U.S. and developing a more detailed U.S. average price for dairy-quality alfalfa hay.

Agricultural spending

The “budget” portion of the agreement paves the way for congressional appropriations committees to carve up discretionary spending, according to the National Sustainable Ag Coalition (NSAC). Their job got easier, though, with spending limits raised $63 billion and $68 billion for fiscal years 2018 and 2019, respectively. It’s estimated the dairy-related provisions in the budget bill create a $1.2 billion in baseline spending for the 2018 Farm Bill, paving the way for additional improvements.

Not all the news from the budget deal is good news for the farm bill, NSAC noted. The bill extends automatic budget cuts (sequestration) for mandatory programs for an additional two years, through 2027.  end mark

Dave Natzke
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