Producers can choose to cover between 25 and 90 percent of their production history and can buy additional protection for margins ranging up to $8 per hundredweight, with higher premiums for larger herds.
Dunn said looking at recent history provides a clue to how the Margin Protection Program might benefit producers.
"In 2009, when the costs of seed, fertilizer, chemicals, diesel fuel and other inputs were extremely expensive, milk prices were in the dumpster, averaging $14.41 per hundredweight for the year," he said. "If the Margin Protection Program had been in effect then, producers would have received payments for 11 of the 12 months of that year.
"But under the old system, which provided payments or price supports only when milk prices fell below a certain price, farmers in 2009 received little or no support because the target price wasn't reached," he said. "Unless they had bought insurance or used some other risk-management system, they were on their own. Some went out of business and defaulted on loans because the cost of production was higher than their income from milk sales."
Another provision in the farm bill established the new, margin-based Dairy Product Donation Program. Under this program, USDA will create demand by purchasing dairy products to donate to food banks or similar nonprofit organizations only if margins fall below $4 for two consecutive months. The purchases will occur for three consecutive months or until margins rebound above $4.
Three dairy programs were targeted for elimination or phase-out in the 2014 farm bill:
• The Dairy Product Price Support Program, under which the government supported prices with a standing offer to purchase cheddar cheese, butter and nonfat dry milk.
• The Dairy Export Incentive Program, which offered subsidies to exporters of U.S. dairy products to help them buy products at U.S. prices and sell them at lower international prices.
• The Milk Income Loss Contract Program, which compensated dairy producers when domestic milk prices fell below a specified level.
Although many Pennsylvania producers currently are doing well with milk prices at or near record highs -- more than $26/cwt. in February -- Dunn said the need for a dairy safety net remains. "History shows us that one thing is absolutely true -- prices will come down again."