U.S. Dairy Markets and Policy Update

Dr. Cameron S. Thraen, Associate Professor and OSUE State Dairy Markets and Policy Specialist, Department of Agricultural, Environmental and Development Economics, The Ohio State University

Policy Update: Margin Protection Program (MPP)

On August 28, 2014, USDA Secretary Vilsack officially announced the start of the new Margin Protection Program (MPP). By the time you are reading this issue of BDN, you will have had the opportunity to participate in a workshop or conference detailing this program.  I will take this opportunity to repeat a few of the program’s key features.

Item 1: If you elect to participate, you will be required to establish a production history (PH) based on the highest annual production from the calendar years 2011, 2012, or 2013.  Once established, your production history will be increased each year by the U.S. average production growth.  There is no penalty for increasing production over this level other than the stipulation that extra production will not be eligible for the coverage under the MPP.
Item 2: Selecting coverage above the lowest level of $4/cwt will require you to pay a premium.  Premiums follow a two tier schedule.  For a production base at 4 million pounds or less, there is one schedule, and for those farms with a production history over 4 million pounds, there is a second more expensive schedule for production over 4 million pounds. 

Item 3: For producers whose annual production is at or below 4 million pounds, the cost of coverage all the way up to $6.50 remains very reasonable, only becoming more expensive at the $7 to 8 levels.  For a producer whose annual production base is above the 4 million pounds, the cost is still modest up to the $5 level, but then increases rather significantly above that point. 

Item 4: You will not be allowed to simultaneously use Livestock Gross Margin (LGM) Insurance and this MPP program.  There are rules in place that spell out very clearly how MPP and LGM-dairy will coexist.  You can continue to use all other tools, such as futures and options and forward pricing, through your cooperative to provide price risk management.

Item 5: To participate, you must register with your local USDA Farm Services Agency (FSA) and complete forms CCC-781 to establish eligibility and production history and also form CCC-782 make program selections for 2014 and 2015.  You must complete and submit these signed forms at your FSA County Office no later than the end of business November 28, 2014.

Item 6: At the time of registration, you will be able to elect a coverage percentage (25 to 90%, 5% increments) and a coverage level ($4 to 8, 50 cent increments).  During this initial period, you will be able to make this selection for the remainder of 2014 and all of 2015. A producer does not have to make this decision now but can wait until the following registration period.  However, once the decision is made to register and participate in the program, you are obligated to pay the $100 administrative fee each year through 2018.  Election of coverage percentage and coverage level are made each year and can be changed during the enrollment period for each year.  After November 28, 2014, the enrollment period will occur from July through September for calendar years 2016, 2017, and 2018.

National U.S. Dairy Margin Update

At the time of this issue of BDN, the concern looking forward is the falling U.S. cheese, butter, and skim milk powder prices and the likely impact on the MPP in the coming year.  At the end of 2014, U.S. dairy commodity prices are realigning with lower world prices, and it is natural to assume that this realignment will result in dramatically lower income over feed costs (IOFC) margins for 2015.  While it is correct that lower commodity prices will pull down the U.S. All Milk Price, this does not translate into a significantly lower IOFC margin.  Why?  Because the feed price side of the MPP margin has experienced an even greater decline with record grain harvest in the U.S.  To pull the U.S. All Milk Price low enough to trigger significant MPP payments, my analysis suggests that Class 3 and Class 4 prices would have to fall by at least $1.50/cwt over what the futures market is currently forecasting for 2015.  This would require U.S. dairy commodity prices falling below world prices quite early in 2015 -  an outcome not very likely.

Margin Protection Program Forecast

A look at the current MPP margin forecast based on the futures market prices as of October 24, 2014 shows the margin to stay above $9.50/cwt through the next 15 months. 

Figure 1

The table below shows that the probability of the MPP margin falling below each of the program trigger prices for each of the critical 2-month periods.  At this time, the probability that there would be a payment is quite low at the $8.00/cwt level for all of the 2015 production year.  At trigger price levels below this mark, the probabilities are even smaller.  Remember, at trigger levels above $6.50/cwt, the cost of margin protection becomes relatively expensive regardless of the magnitude of the production history.

Table 1

If you wish to follow the Dairy Markets and Policy DPMPP margin forecast, go to the DmaP website and click on MPP Decision Tool.  The information shown in the figure and the table are updated daily. (http://dairymarkets.org/MPP/)

You can also access this information on the USDA FSA website: http://www.fsa.usda.gov/FSA/pages/content/farmBill/fb_MPPDTool.jsp

If you would like to read or hear more about the MPP program, link into the Dairy Markets and Policy website (http://dairymarkets.org/MPP/), where you will find a wide assortment of support information on this new program.