As a joint program, MILC-Insurance combines the benefits of both programs and ensures a safety net on either the milk price or the IOFC margin. As a result, during favorable margin outcomes the combined program does not reduce the expected benefits compared to a MILC only program. In fact, based on the simulation results all farms (large and small) would benefit more from a counter-cyclical MILC program when margins are favorable. It is only when IOFC margins fall to low levels would an IOFC program be preferred to MILC.
When IOFC margins are poor the MILC-Insurance program would provide two times the support of MILC for the 5000 farms in this analysis. For example, given 2013 margins combined program would provide $32-48 million dollars while MILC would only provide $23 million dollars. The difference in the MILC-Insurance program payments is due to the $6.00 and $6.50 supplemental insurance cap, with $6.50 coverage providing an additional $16 million in revenue support to dairy farmers.
The solid black line represents the mean first-stage IOFC margin, the shaded region represents to middle 50% of first-stage IOFC observations, and the dashed line represents the actual IOFC margin calculated using announced USDA prices for all-milk, corn, soybean meal, and alfalfa hay. Catastrophic scenario corresponds to 01/15/2009, Mean Reverting to 01/15/2008 and Above Average to 01/15/2010.
During the catastrophic margin outcome the average per cwt payment from a counter-cyclical payment program is approximately $1.06 for herds under 99 head. The effective support price declines rather sharply for farms that produce more than 2.985 million pounds annually. For farms with 100-499 head the revenue support was $0.75 per cwt, for farms with 500-999 head the revenue support was $0.33 per cwt, and for farms with 1000+ dairy cows the expected MILC benefit is only $0.08 per cwt. This pattern, albeit not as extreme, is also observed in other price scenarios and in each example the largest farms receive the smallest share of total benefits. Given these results it is evident why some argue that coverage provided via MILC is inadequate and outdated (Thraen 2007; D'Antoni and Mishra 2011).
By design the disparity in per cwt benefits is eliminated when analyzing the DFA and MILC-Insurance program. Under the DFA margin insurance program farms electing similar coverage options have similar net benefits per cwt. Under MILC-Insurance the benefits per cwt are similar when farms participate in the IOFC program, and are only $0.20-$0.50 per cwt less than those under a margin insurance only program. The key benefit of a MILC-Insurance program relative to insurance only is found during favorable margin years: For example, during the above-average scenario the expected benefits per cwt for DFA were near zero for farms who elected to remain in the program; meanwhile, under the MILC-Insurance program not only did farms not opt-out of a government safety net, but they received benefits up to $0.04 per cwt.