By SUSAN MYKRANTZ
WASHINGTON, D.C. — Changes to the 2018 farm bill may offer some relief to dairy producers, according to representatives from the American Farm Bureau Federation (AFBF) and the National Milk Producers’ Federation (NMPF).
“The most significant change for dairy in the new farm bill is the restructuring of the previous Margin Protection Program (MPP) into the new Dairy Margin Coverage program,” said Alan Bjerga, with the NMPF. “The new plan should be much more useful for producers, with more affordable coverage at higher levels geared toward benefiting small dairies, along with affordable basic coverage levels that should be more attractive to larger producers.”
Bjerga said the MPP in the 2014 farm bill was the right concept, with the wrong execution. “Margin protection offered as a form of insurance, in theory, targets aid to farmers when they need it, at levels appropriate to the need.
“But the MPP didn’t work that way, in part because of how feed-cost calculations and premium rates were set as part of an effort legislators made to make the program fit a budget number. The new program is based on policy, not politics, and we expect it will be more popular and useful for producers.”
The new program requires the USDA’s National Agricultural Statistics Service to revise the monthly survey reports to include prices for dairy-quality alfalfa hay and analyze data regarding average producer feed costs.
The new program also features an increased level of coverage, a refund provision and a change in the factors driving the milk price, according to Dr. John Newton, chief economist with the AFBF. It went into effect on Jan. 1, so farmers are allowed to sign up for the program retroactively to the beginning of 2019.
Newton said under the new farm bill, the successor to the former MPP is now referred to as Dairy Margin Coverage (DMC), but it will still be administered by the Farm Service Agency and the annual administrative fee will remain at $100. The new program also allows producers to use other risk management tools such as Dairy Revenue Protection and Livestock Gross Margin for Dairy Cattle.
Bjerga predicts that more affordable coverage and higher-quality coverage tailored to benefit dairies of all sizes should spur increased participation.
The new program adds three new coverage levels for Tier 1 production of $8.50, $9 and $9.50 per cwt. A new feature of the program allows farmers buying one of these coverage points for Tier I levels to also choose a different buy-up level for their Tier II production over 5 million pounds.
“National Milk really doesn’t have a ready-made definition of ‘small’ and ‘large,’ and that’s because those definitions vary by region,” said Bjerga. “A 300-cow operation, for example, would look very different depending on whether it’s in Vermont or California.
“But I can say that the Dairy Margin Coverage program is designed to make insurance extra affordable for the first 5 million pounds of milk a producer produces – the idea that so-called Tier 1 production covers smaller dairies. That level would be roughly 200 to 220 cows.”
Newton added the enhanced margin safety net offers more protection to the first 5 million pounds of milk covered (about 215 milking cows). Milk covered in excess of this is subject to higher premium rates for shallow-loss coverage but can be covered at catastrophic coverage levels such as $4.50 and $5 per cwt. at low-cost premium rates.
“For medium-to-large dairy operations, the benefits of Tier 1 coverage were extended through two functions,” he explained. “First, the coverage percentage was changed to range from 5 percent to 95 percent in 5-percentage-point increments. Under the 2014 farm bill, the coverage percentage ranged from 25 percent to 90 percent. This modification allows larger farms to cover lower volumes of milk, and smaller farms to cover higher volumes of milk.”
Under the old system, production in excess of 5 million pounds required both Tier 1 and Tier 2 coverage and substantially increased the cost of participation. With the second coverage election for Tier 2, it offers producers more coverage for their first 5 million pounds, while excess production can have a second coverage rate.
“This flexibility allows medium and large dairy operations to receive affordable Tier 1 and Tier 2 protection,” Newton added.
He said coverage ranges from a low of $4 to as high as $9.50 per cwt. Although farmers may re-select their coverage options on an annual basis, farmers who lock in their coverage for a five-year period will receive a 25 percent discount on premiums.
Program payments could be triggered monthly to be made if the DMC margin falls below the farmer’s elected coverage level. They are based on the amount of milk covered in the program and range from 5-95 percent of a farm’s milk production history in 5-percent increments. This program increases coverage from 4 million pounds under the MPP to 5 million pounds under Tier I.
Newton said farmers who paid MPP premiums between 2014-17 are eligible for a refund or they can receive a credit toward their premiums in the DMC program. The 2018 farm bill will refund up to 75 percent of the premiums paid by dairy farmers, not including administrative fees, for MPP coverage during the 2014-17 coverage years.
He said producers can receive their refunds in one of two ways: either 50 percent of the repayment as a direct cash repayment, or 75 percent of the repayment as a credit toward DMC for the 2019-23 coverage years. If a farmer selects this option they need to consider the total amount of the potential refund compared to the cost of DMC coverage over the five-year life of the farm bill.
Other features of the new program include changing the Class I mover to the average of Class III or IV plus 74 cents; the authorization of a program to test methods to increase consumption by nutrition-assistance recipients, by providing incentives at the retail level to purchase fluid milk; modified milk pricing provisions to facilitate improved risk management for the beverage milk industry; authorization of a milk donation program; and reauthorization of the Dairy Forward Pricing Program through 2023.
The new program will also allow farmers who were prevented from participating in MPP following the Bipartisan Budget Act due to an existing LGM-D policy, to retroactively receive MPP benefits for 2018.
The bill includes a Dairy Business Innovation Grant program requiring the USDA to establish a minimum of three regional innovation centers to provide technical assistance and grants, to promote dairy product innovation and diversification and expand processing capacity to respond to the oversupply of milk.
Newton said with the new dairy title, dairy farmers will have access to a variety of affordable risk management tools to protect against downturns in the income-over-feed-cost margin or downturns in the revenue from milk sales.
He said current projections are for margins to remain below $9.50 per cwt. through November, making DMC an attractive risk management tool.
“Dairy farmers will now have the flexibility to use both Title I and crop insurance tools simultaneously” he explained. “Combined, these tools will allow farmers to have more skin in the game and proactively and consistently manage risks at the farm level.”