The ink isn’t dry on rules regarding the Margin Protection Program (MPP) included in the 2014 farm bill. But economists say evidence suggests farms, legally, found opportunities under MILC to maximize safety net benefits, and they could do the same under MPP.

The conclusion is reached on a poster developed for the July 2014 annual meeting of the Agricultural and Applied Economics Association, to be held in Minneapolis, Minn., by John Newton (University of Illinois), Cameron S. Thraen (The Ohio State University), and Mark Stephenson (University of Wisconsin).Economists: Farms may ‘game’ new dairy law

The three economists, part of the National Program on Dairy Markets and Policy (DMaP), show on their poster that farms with over 2.985 million pounds of milk marketings per month did very well in predicting the “best” month of the fiscal year to sign up for Milk Income Loss Contract (MILC) funding. The 1,243 farms in the study picked the best month with amazing accuracy. The group says on the poster, “Confirmation of strategic behavior in MILC indicates that farmers may adversely game the MPP program to maximize financial returns.”

According to Newton, lead author on the poster, this means that if we have a time of predictably low margins under MPP, “Imagine significant indemnity payouts, especially considering we no longer have a cap on coverage.”

Newton and the team evaluated the largest farms during MILC years 2009, 2010, 2012, and 2013. In 2009, 2010, and 2013, the farmers picked the right month at least 80% of the time.

 

FY 2009

FY 2010

FY 2012

FY 2013

Percent largest farms picking “best” month

80%

91%

4%

86%

MILC opportunity (per cwt)

$2.00

$0.60

$1.64

$0.75

Newton notes that the disparity in 2012 was likely the result of a late rise in feed prices and MILC payment opportunities earlier in the fiscal year. MPP will be selected year by year, but if farmers use information in a similar manner, they may be able to adjust coverage levels up or down based on anticipated risk in milk and feed markets, Newton said.

Source: AAEA conference proceedings