The new margin protection program can be an effective risk management tool for producers.
The insurance can protect against margin squeezes, such as the ones that occurred in 2009, 2012 and 2013. Producers can use futures prices as one factor in determining what margin level to choose and how much of their production history to cover.
There are still important questions to be answered. For example – how will the signup period correspond to the start of the program each year? With signup right before the start of the program year, producers could have more information about what level of margin to expect. However, a recent report suggests that signup may be as much as 120 days before the start of the program! It is not clear when the premium will be paid; up front or after the year is over. Hopefully, the official rules for the program will be available by late summer.
Current milk and feed prices suggest that milk production margins will be pretty good this year and margin insurance may not be needed. But things can change pretty quickly over the spring and summer months, depending on crop production prospects.
With the delay in getting the program rules in place, milk producers will probably have good information on the outlook for crop prices. That may not be the case in future years. Each year producers will have to make decisions about how to manage the risks associated with milk prices and feed costs. Nonetheless, this new program will be a very important tool for managing price risks.