Weakening dairy margins may be pulling MPP-Dairy back into play for 2018

Progressive Dairyman Editor Dave Natzke Published on 01 November 2017

Downward-trending milk income margins may be pulling the Margin Protection Program for Dairy (MPP-Dairy) back into play as an income safety net for 2018. Dairy farmers are advised to watch market conditions over the next six weeks to determine best options the next year.

Alan Zepp, risk management program manager at Pennsylvania's Center for Dairy Excellence (CDE), reviewed MPP-Dairy, the Livestock Gross Margin-Dairy (LGM-Dairy) program and puts and options on the Chicago Mercantile Exchange (CME) futures market during his monthly “Protecting Your Profits” conference call on Oct. 25.

“The market has fallen to a level to where market-based programs are not providing an opportunity for producers to get excited about,” said Zepp. “LGM-Dairy has provided a better safety net; but looking ahead, we don’t know. While farmers can opt out of MPP-Dairy, but it might be the better alternative going forward. Producers should watch markets over the next six weeks to make final decisions,” Zepp said.

Read also: November dairy economic update: Make winter plans

Comparing costs

Milk futures prices were mostly weaker as October came to a close. As of Oct. 25, the 12-month average Chicago Mercantile Exchange (CME) Class III futures price was $15.67 per hundredweight (cwt), down about $1 in the previous 60 days. The Class IV futures price was $14.98 per cwt, down about 90 cents in the previous 30 days. With those weaker prices, dairy farmers should compare costs for all available marketing/safety net options.

• LGM-Dairy: The 10-month (December 2017-September 2018) insurable margin under the LGM-Dairy program for the sales period held Oct. 27-28 was $7.47 per cwt, at a cost of 45 cents per cwt. A $1 deductible policy was available for 9 cents per cwt. The $7.47 per cwt insurable margin was the lowest since 2016.

• MPP-Dairy: The projected average margin under the MPP-Dairy program through the first half of 2018 was $8.80 per cwt, still above the top trigger level of $8 per cwt. However, if margins continue to shrink, MPP-Dairy could become an option.

For producers with annual production under 4 million pounds of milk per year, the margin coverage ($ per cwt) and premium cost (cents per cwt) for MPP-Dairy protection are as follows:

$4.50 – 1 cent

$5 – 2.5 cents

$5.50 – 4 cents

$6 – 5.5 cents

$6.50 – 9 cents

$7 – 21.7 cents

$7.50 – 30 cents

$8 – 47.5 cents

For producers above the 4-million-pound milk threshold, premium costs are:

$4.50 – 2 cents

$5 – 4 cents

$5.50 – 10 cents

$6 – 15.5 cents

$6.50 – 29 cents

$7 – 83 cents

$7.50 – $1.06

$8 – $1.36

• Futures markets: As of Oct. 25, the 12-month Class III futures price averaged $15.67 per cwt. The January 2018 Class III futures contract price was $15.30 per cwt. Locking in a floor price with a $15.25 per cwt “put” cost 36 cents per cwt, with a $14.25 per cwt put (equal to a $1 deductible policy through LGM-Dairy) costing 7 cents per cwt.

What are your options?

Dairy farmers have until Dec. 15, 2017, to make 2018 MPP-Dairy decisions, including the ability to opt out of the program.

After that date, farmers also have the option of late filing. However, late filers are limited to participation at the catastrophic level, providing protection at the $4 per cwt margin level, according to Cindy Walters, agricultural program specialist with Pennsylvania’s USDA Farm Service Agency (FSA). And, late filing does not provide protection retroactively. If a farmer files for 2018 MPP-Dairy in July 2018, he/she would not receive any payment for the January-February, March-April or May-June MPP-Dairy pay periods, even if the margin falls below $4 per cwt at any time during the first six months of the year. To be eligible for late filing, farmers cannot enroll in Livestock Gross Margin for Dairy (LGM-Dairy), a separate margin insurance program administered through the USDA’s Risk Management Agency.

Read also: Weekly Digest: MPP-Dairy late filing a ‘black swan’ option

Producers who opt out of 2018 MPP-Dairy coverage (and don’t late file for MPP-Dairy) will be eligible to purchase LGM-Dairy coverage beginning with the Nov. 17-18, 2017, sales period, with margin coverage beginning in January 2018. That allows farmers to transition from MPP-Dairy to LGM-Dairy without a lapse in coverage and will ensure coverage under both programs does not overlap, which is prohibited by law.

Zepp’s next Protecting Your Profits call is scheduled for Nov. 15. The conference calls are free, but registration is needed to obtain the call information. Contact the Center for Dairy Excellence at (717) 346-0849 to register and receive more information about the monthly conference call learning series or by email.  end mark

Dave Natzke
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