Deriving the Margin
The Margin Protection Program (MPP) in the Dairy Title of the Farm Bill uses a ration (Table 1) described with market prices for corn, soybean meal and alfalfa hay that was developed by the National Milk Producers Federation (NMPF) in conjunction with prominent dairy nutritionists. The ration incorporates all animal groups including the lactating and dry cows as well as heifers. The ration is based on a 1,000-cow herd milking 68.85 pounds per day with an 80% replacement ratio.
Table 1. NMPF Ration: herd size, feed ingredients and amounts fed
|# Head||Total DM Lbs/Day||Corn Silage||Shelled Corn||Soybean Meal||Alfalfa Hay|
|% of total DM|
|Total Milking Cows||1000|
|Heifers expected to calve within 1 year||394||23||50%||5%||15%||30%|
|Heifers 500 lbs or over||203||15||50%||10%||15%||25%|
|Heifers <500 lbs||203||7||45%||25%||15%||15%|
|Source: NMPF, National Milk Producers Federation, 2010.|
Using this ration, the coefficients making up the final national margin formula are calculated based on the ration quantities of each ingredient for each animal group. The national all-milk price and shelled corn and alfalfa hay prices will be determined by the Agricultural Price Report from USDA National Agricultural Statistic Service (NASS). The soybean prices will be based off of the Central Illinois Soybean Processor Report from USDA Agricultural Marketing Service (AMS).
The final margin formula is:
All Milk Price - (1.0728 × Shelled Corn Price/bu + 0.00735 × SBM Price/ton + 0.00137 × Alfalfa Hay Price/ton)
This margin is used to determine the level of support producers enrolled in the MPP will receive based their elected coverage. The following section considers theoretical implementation of the MPP comparing to the Penn State dairy herd’s margins during 2009 and 2012.
Margin Protection Program Payment Scenarios
Of the past five years, 2009 and 2012 have been the most challenging for dairy producers. The Margin Protection Program offers margin protection between $4.00 and $8.00 (at $0.50 increments). In these scenarios, three levels of the dairy producer margin protection were examined: $4.00, $6.00, and $8.00/cwt. This article will focus on the $4.00/cwt margin protection, because there are no premiums to obtain coverage at this level. Premiums for margin protection begin at $4.50/cwt through the maximum $8.00/cwt. A $100 annual fee is applied at program signup and guarantees the $4.00/cwt margin protection with no premium payment.