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Common Ground
Farm Credit Services of America Blog

Signup is Open for the Dairy Margin Protection Program

by FCSAmerica Staff Reports | Aug 13, 2015

Dairy CattleThe open enrollment period for the 2016 Dairy Margin Protection Program (MPP) through FSA opened July 1 and will run through Sept. 30.

Acceptance of the MPP has been good. “More than half the nation’s dairy producers enrolled in 2015,” according to Krysta Harden, USDA deputy secretary, who notes the participation exceeded expectations for the first year of the program. Some were constrained by having already purchased Livestock Gross Margin (LGM) protection through the RMA: MPP would kick in only after a producer’s LGM coverage expired. As a group, the producers who enrolled in MPP covered 85.4% of their production history.

The MPP makes a payment when the margin between milk price and feed costs during one of the defined two-month periods (January/February, March/April, etc.)  is less than the margin coverage chosen by the producer. You can continue with the catastrophic $4 level at 90% of your production history or pay a premium to buy up price coverage on 25% to 90% of your production history in 5% increments, but you are allowed only one election on your entire production base.

A bit more than half (58.4%) of producers who enrolled in 2015 stayed with the catastrophic coverage of $4/cwt. margin based on milk price minus feed costs, applied to 90% of production history. That coverage is free to producers who sign up and pay the $100/year administrative fee, which applies to all participants. The next most popular coverage was $6.50, with 26% paying the 9¢/cwt. premium for that coverage, followed by $6 at 15.5% and $7.50, at 5.8% of producers.

As a measure of likelihood of payoff, between 2006 and 2013, the percent of time that margins would have fallen below various price thresholds, according to Joe Horner, Extension economist at the University of Missouri, was:

Margin

$4

$4.50

$5

$5.50

$6

$6.50

$7

$7.50

$8

Payoffs

13%

13%

15%

15%

23%

25%

33%

38%

50%

Tier 1 premium / cwt.

 

0

 

 

2.5¢

 

 

5.5¢

 

 

21.7¢

 

30¢

 

47.5¢

Tier 2

0

10¢

15.5¢

29¢

83¢

$1.06

$1.36

The cost to boost coverage above the free $4 catastrophic protection is shown in the bottom row of the table. Tier 1 premiums apply to annual marketings below 4 million lb. Tier 2 premiums for production above 4 million lb. are twice as much or more expensive. Notice the large jump in premium increases at the $7 level for both Tiers. Most producers milking more than 3,000 cows and financed through Farm Credit Services of America’s Agribusiness Finance team have signed up for the catastrophic coverage and many have bought up to $6.50/cwt. over coverage. Above that price threshold, it is difficult to justify the increase in coverage cost.

For instance, even though there’s a 50% chance of payoff at an $8 margin, the stiff premium reduces the likelihood a producer will choose to buy up to that level on a large percentage of production. For example, based on the January/February margins, FSA made payments to 261 producers and some checks were for only $17, according to Kent Politsch at RMA. “March/April had the same results. Thankfully the market price has meant that lower coverage levels haven’t kicked in so far this year.”  In most states, average percent of production history covered was 80% to the maximum of 90%.

Note that each two-month payment is annualized, with the potential for six payments per year. As an example, suppose your production base is 3 million lb. (30,000 cwt.) and you choose 50 percent coverage at a margin of $7. Suppose FSA’s calculated margin is $5, a $2 difference. The payment would be $2 x 50% = $1 x 5,000 (30,000 / 6 – annualizing the two-month period) = $5,000.

Program Basics

To be eligible for MPP-Dairy, the operation must:

  • produce and commercially market milk from cows located in the United States;
  • provide proof of milk production at the time of registration (your production history is the highest level of annual production during 2011, 2012 or 2013; if you enrolled in 2015, it will increase 2.6% in 2016 under the rule that it is adjusted by any increase in the amount of milk marketed nationally
  • not be enrolled in the Livestock Gross Margin - Dairy program through RMA
  • meet conservation compliance provisions
  • agree by all involved producers to the coverage elected on the contract

Enrollment requires submitting form CCC-781 to establish production history and form CCC-782 to elect annual coverage. An administrative fee of $100 is charged to enroll. If you “buy up,” you need to pay at least 25% of the premium for the coverage you choose by Feb. 1 and the balance before June 1. This is calculated by multiplying your historical production by the percent coverage you select by the premium for the margin level you select. For example, if your production history is 3 million lb. (30,000 cwt.) and you select 50 percent coverage at $7, your premium would be $3,255 (50% = 15,000 x .217).

Producers, who enroll for 2016, are opting in for the life of the farm bill (through 2018), notes Politsch. “But they will re-elect their coverage during the enrollment period each year.” Failure to elect results in a default coverage at the CAT level.

Additionally, enrolling in MPP precludes enrolling in RMA’s LGM program.

Adjusted gross income restrictions in the 2014 farm bill don’t apply to this program.

For details about the program, including how the margins are calculated; 2015 enrollment results; and a link to the USDA’s signup decision tool.

Click to visit a calculator on the FSA website to determine costs at various production levels.

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