Now might be a good time for dairy producers to consider implementing risk management tools found within the new farm bill.
"U.S. dairy producers are facing a cost-price squeeze due to increasingly volatile farm-level milk prices and rising feed costs," said Kim Dillivan, Crops Business Management Field Specialist. "As a result, policy stakeholders developed provisions for the Agricultural Act of 2014 to help dairy farmers manage risk during periods that are economically challenging."
Dillivan explained that until the recent farm bill, USDA surveys showed that dairy producers under-utilize risk management tools such as forward pricing, options and futures. "In this environment, existing federal dairy policy designed to only support product prices fails to provide an adequate safety net for producers."
The Agricultural Act of 2014 repeals dairy programs that focus solely on price support, and replaces them with two new margin insurance programs. The Act also continues several other dairy provisions.
Dairy Programs Repealed in the 2014 Farm Bill
The Dairy Product Price Support Program (DPPSP), the Dairy Export Incentive Program (DEIP), and the Federal Milk Marketing Order Review Commission were repealed in the Agricultural Act of 2014.
Although also repealed in the new farm bill, the Milk Income Loss Contract Program (MILC) is available until the new Margin Protection Program for Dairy Producers (MPP) becomes operational. According to the farm bill, the MPP will be implemented no later than September 1, 2014.
"Authorized by the 2008 Farm Bill, the DPPSP was a dairy price support program that was generally ineffective because of a relatively low support price," Dilivan said.
He added that the DEIP provided bonuses to dairy exporters allowing them to sell certain dairy products at prices below cost, helping the exporters remain competitive in international markets. The Federal Milk Marketing Order Review Commission had responsibilities that included the review and evaluation of federal milk marketing orders. MILC, another price support program, compensates domestic milk producers should milk prices fall below a certain level.
Dairy Programs Reauthorized in the 2014 Farm Bill
The Dairy Forward Pricing Program, the Dairy Indemnity Payment Program and the Dairy Promotion and Research Program are reauthorized through 2018.
The Dairy Forward Pricing Program allows dairy producers to participate in forward pricing contracts with handlers of pooled milk.
The Dairy Indemnity Payment Program provides payments to producers should their milk become unfit for consumption because of contamination by pesticides or other toxic substances.
The Dairy Promotion and Research Program, administered by the National Dairy Research and Promotion Board, works to increase milk and dairy product demand through promotion, research, and education initiatives. Another program that continues is the Milk Price Support Program (MPSP).
Milk Price Support Program
The Agricultural Act of 1949 created the MPSP. This permanent piece of legislation was designed to set a price floor under all milk and dairy products, Dillivan explained.
"Should the market price for milk fall below the farm-level support price, MPSP directs USDA to purchase from vendors butter, cheese, and nonfat dry milk at levels that would raise the milk market price to a level no less than the support price," he said.
A USDA offer to buy dairy products at levels that exceed current market prices would provide an incentive for dairy manufacturers to sell products to the government, reducing commercial supply and raising price.
By law, the 1949 Act required that milk be supported at 75-90 percent of parity. Since 1981 however, the support price has been established by Congress either at a specific level or by formula related to expected surplus.
The 2002 Farm Bill required the Secretary of Agriculture to support the price of milk at $9.90 per hundredweight through the purchase of cheese, butter, and nonfat dry milk. The 2008 Farm Bill reauthorized MPSP as DPPSP, beginning January 1, 2008 and ending December 31, 2012. Subsequent congressional legislation extended DPPSP until it was repealed by the 2014 Farm Bill.
New Dairy Margin Programs
Rather than support prices, Dillivan explained that the main feature of dairy policy in the Agricultural Act of 2014 is the protection of producer margins.
"These gross margins are calculated as the difference between an average national milk price and a representative cost of dairy feed. Should margins fall below a producer-selected level, indemnity payments will be authorized based upon actual milk production history and a coverage level participants elect," he said.
Participating dairy producers pay premiums for the margin insurance, thereby cost-sharing with the federal government.
The two new margin protection programs, Dillivan said, are the Margin Protection Program for Dairy Producers (MPP) and the Dairy Product Donation Program (DPDP).