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The farm bill dairy program

Tuesday, January 29, 2019   (0 Comments)
Posted by: Lauren Brey
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By Mark Stephenson, Director of Dairy Policy Analysis, University of Wisconsin

What’s old is new!

Just before Christmas, President Trump signed the farm bill into law. Many have described the bill as being largely “status quo,” but changes to the Margin Protection Program (MPP) were substantial and make the new program well worth a second look.

The dairy program was renamed to Dairy Margin Coverage (DMC) and will be in effect from now until the end of the current farm bill in 2023. The DMC will calculate a milk-feed margin just like before. It will also use historic production as already determined for most producers, and producers can choose a coverage level and percentage just like they did with the previous program. But, many parameters were changed that make the new program much more desirable.

The MPP program was constructed with two tiers of premium payments: a much lower Tier 1 for the first 4 million pounds of historic production and Tier 2 premiums for additional coverage. In DMC, Tier 1 is increased up to 5 million pounds and the premiums are considerably lower than before. In contrast, Tier 2 premiums were increased. The other change is that Tier 1 coverage levels were added up to $9.50 making the DMC potentially much more sensitive to trigger indemnity payments (see graph). However, there is no coverage option for Tier 2 above the $8 level.

As an example, the original Tier 1 premium for $8 coverage cost 47.5¢ and now it costs only 10¢.  And, the Tier 1 premium for $9.50 coverage only costs 15¢. That is a very reasonable price for substantial risk management for smaller farms. Since there is no Tier 2 option for $9.50 coverage level, the new DMC allows farms to purchase Tier 2 coverage at any other level. For example, the $5 level of coverage only costs a half-cent and would provide inexpensive catastrophic coverage for even larger farms.

The percentage range of historic production that a producer can choose is changed. Under MPP, the choice was between 25 and 90 percent, but under DMC the range was expanded on both ends to between 5 and 95 percent. This also makes it easier for larger farms to participate while avoiding almost all Tier 2 payments if desired.

There are a couple of final changes to MPP that are worth mentioning. First, producers will be able to choose between two options: 1) sign up annually with your choice of coverage level and percent as in the MPP, or 2) sign up for the full 5 years of the farm bill with a single choice of level and percent and receive a 25 percent discount on the cost of the premiums.

What would I do?

Sign up for the five-year coverage with a discount. At a maximum of 15¢, the discount isn’t much but you will set your coverage and not have to think about it again for the next five years.

If I am a smaller farm (fewer than 250 cows) where almost all of my historic production is less than 5 million pounds, I would buy as much as I can at the $9.50 level. At 15¢ it is inexpensive risk management and it offers good coverage for all of your milk production.

If I’m a larger producer, buy as much $9.50 coverage as you can and put the Tier 2 coverage at the $5 level. Half a cent is inexpensive catastrophic coverage for your remaining milk.

One last benefit is that the DMC can be used with any other risk management program—including LGM-Dairy or Dairy-RP. The Tier 1 protection is good basic risk management and you can fill in with other risk management tools.

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