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Proposal could require USDA to calculate state MPP-Dairy margins

Progressive Dairyman Editor Dave Natzke Published on 14 April 2016

Northeast U.S. lawmakers introduced legislation calling for modifications to the Margin Protection Program for Dairy (MPP-Dairy), potentially leading to state-level income margin calculations.

The Dairy Margin Insurance Location Calculation Act of 2016 (H.R. 4896) was introduced April 11 by U.S. Representatives Chris Gibson (R-New York) and Joe Courtney (D-Connecticut). U.S. Rep. Peter Welch (D-Vermont) served as a co-sponsor. The bill was assigned to the House Ag Committee.

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H.R. 4896 would amend the 2014 Farm Bill, which created MPP-Dairy. It would require USDA to use monthly feed (corn, soybean meal and alfalfa hay) costs from each of the 50 states to calculate milk income over feed cost margins.

Currently, USDA uses national average milk, corn and alfalfa hay prices, along with a central soybean meal price, to calculate a monthly national MPP-Dairy income margin. That national average determines indemnity payments for dairy farmers who enrolled in the federal margin insurance program.

Expanding data reporting

Collecting prices from all 50 states could substantially add to USDA reporting requirements.

Currently, USDA reports monthly milk prices for 23 major dairy states, alfalfa hay prices for 27 states, and corn prices for 18 states. Only 11 states are monitored monthly for all three categories. Monthly corn prices are not reported for any states west of Colorado or Texas.

The USDA corn and alfalfa hay prices used in the formula actually incorporate those paid to the growers of those crops, not necessarily the purchase price paid by dairy farmers.

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Although USDA reports monthly soybean prices for 18 states, it does not report soybean meal prices in the Ag Prices report. As directed by the 2014 Farm Bill, a single monthly average soybean meal price, collected by the USDA Ag Marketing Service at central Illinois, is used in the MPP-Dairy calculations.

H.R. 4896 would also require USDA to consider energy, transportation and labor costs in its calculations.

Some history

At the time MPP-Dairy was initially created, it was part of the massive 2014 Farm Bill. The program was an outgrowth of a “Foundation for the Future” initiative developed by the National Milk Producers Federation (NMPF), with the congressional charge led by Rep. Collin Peterson (D-Minnesota).

MPP-Dairy was developed in the heat of budget debates threatening USDA outlays for farm safety net programs. It was seen as a major national reform to previous federal dairy policies historically characterized by regional infighting.

MPP-Dairy initially quelled regional debate, although it has simmered below the surface throughout the short life of the program. With nearly two years of actual margins now in the books, regional differences are showing up.

In introducing their legislation, the Northeast lawmakers said the current program is harmful to New York and New England dairy farms because it uses calculations reflecting conditions that predominate in the Midwest and elsewhere.

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According to the bill’s text, recent analysis by Farm Credit East showed the average price of feed paid by producers in the Northeast could be 20 percent higher than the average national feed cost.

“Our farmers work 365 days a year to feed our country and protect the rural landscape,” said Gibson, who serves on the House Agriculture Committee. “Unfortunately, dairy farms across the Northeast are experiencing significant losses because the prices they’re paid reflect the cost of feed in states where energy, labor and transportation are a lot cheaper.”

“We need to do everything we can to support our small farmers and local agriculture,” said Courtney. “It is unfair that dairy farmers across the Northeast, including in Connecticut, are forced to calculate their feed costs based on averages that are heavily weighted toward Midwest farming operations. The system established under the recent Farm Bill puts farming operations in our region at a competitive disadvantage, and our farmers have asked that we take action to level the playing field.”

“This commonsense legislation improves the federal dairy insurance program so that it more accurately reflects the labor, transportation and feed costs experienced by farmers in our region,” said Welch.

Bob Wellington, senior vice president of economics, communications and legislative affairs for dairy cooperative Agri-Mark, said, “The margin protection program was established in the last Farm Bill to provide an income safety net for family dairy farms. Unfortunately, it needs some modifications to meet that goal. This bill will accomplish that.”

February comparisons

While the proposal to modify MPP-Dairy came from Northeast lawmakers, dairy producers in Texas and Michigan seem to fare worst under the current MPP-Dairy formula, based on recent trends.

USDA’s Farm Service Agency (FSA) reported a February 2016 U.S. average margin of $7.91 per hundredweight.

Margin calculated by Progressive Dairyman, using the MPP-Dairy formula and USDA’s state prices for corn, alfalfa hay and milk, ranged from a high of $9.94 per hundredweight in South Dakota to a low of $6.63 per hundredweight in Texas, a difference of $3.31 per hundredweight.

For all of 2015, the national average MPP-Dairy margin was $8.31 per hundredweight. Texas margins averaged 73 cents per hundredweight less than the national average, and Michigan margins averaged 47 cents less.

In contrast, South Dakota margins averaged $2.52 per hundredweight above the national average, with Wisconsin averaging $1.54 higher.

Alfalfa hay price spread wide

Other costs aside, diverging alfalfa hay prices are likely creating some of the disparity in state MPP-Dairy calculations. February alfalfa hay prices ranged from a high of $225 per ton in Kentucky and $216 per ton in New York, to $90 per ton or less in North Dakota, Nebraska, Minnesota and Wisconsin. The nationwide average was $142 per ton.

Pennsylvania and New York consistently had some of the highest hay prices during 2015, averaging $237 and $209 per ton, respectively.

Since changes called for under H.R. 4896 would likely require re-opening the entire 2014 Farm Bill, its chances of success seem minimal during a presidential election year. One government legislative tracking website gives the bill an 18 percent chance of getting out of committee, and just a 4 percent chance of being enacted.

Download the Dairy Margin Insurance Location Calculation Act of 2016. PD

Dave Natzke
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