If MPP-Dairy is anything, it’s easy to understand. The Margin Protection Program for dairy, designed and included in the most recent farm bill, has been heralded as a great success. Versus MILC (the now-expired Milk Income Loss Contract program), MPP-Dairy offers more insurance at more times, offers greater protection to more herds, and is really easy to understand.
Have we said it’s really easy to use? Really.
You need to pick two numbers if you enroll in the program: what level of insurance do you want (between $4 and $8) and what percent of milk do you want to cover (between 25% and 90%, in 5% increments). The only other number you need to know is your highest milk producing year among 2011, 2012 and 2013.
To sign up, travel to your FSA office between now and November 28 (although many in the industry are strongly urging you not to plan on signing up on Black Friday), pay them $100 to start, and then your additional premium. You can either pay it all in full now to defer taxes in 2014, or pay 25% in February and an additional 75% in June.
It’s that easy. Yesterday, during a town-hall meeting hosted by Minnesota Milk Producers’ Association, Marin Bozic, suggested that one big difference is that basic coverage is not free.
“If you want the same level of coverage as MILC,” Bozic explained, “you can’t just sign up at $4. You will need to buy coverage in the $5.50 to $6.00 range for the same protection you had under MILC.”
Bozic, an assistant professor in applied economics at the University of Minnesota, is part of the multi-university Dairy Markets & Policy team that built the official USDA “decision tool” to help farmers better understand the new program.
You can access that tool here: http://dairymarkets.org/MPP/Tool/
The Decision Tool allows you to look at your expected margin if enrolled at different levels in the program, and what your net income or loss would be at current futures prices.
It also lets you look back in time. For example, on September 30, 2008, if you made 3 million pounds of milk per year, and were planning to buy coverage for 2009 at $7 on 90% of your milk, it may have looked like you were going to get a net return of $11,188. But when, unexpectedly, prices tanked in 2009, participating at that level would have actually netted you $64,477 in what many call dairy’s most catastrophic year of all time.
“I don’t buy really good car insurance hoping I hit a deer,” Bozic explained. “This program is supposed to help you in really bad times, but you shouldn’t always be collecting.”
Margins on LGM-Dairy are currently better
But for all the hoopla, hubbub, and celebration made about the passing of MPP-Dairy, there’s another, older program that is currently of greater benefit, if you’re willing to pay more premium: LGM-Dairy. Unlike, MPP-Dairy, it’s not easy to explain, not easy to sign up (relative to MPP-Dairy at least, as you need to find a private insurer who carries it), and would require buying it more frequently than once a year. But anyone who sells it would claim that, today, it’s the better deal than MPP.
We won’t dare to go into detail about how LGM-Dairy works, but Bozic recently wrote an article comparing LGM-Dairy against MPP-Dairy for the regional Dairy Star newspaper, view that article here “LGM-Dairy vs. Margin Protection Program: What would work better for you?”
Within the same decision tool that we mentioned before, there’s a tab in the top left corner to switch your coverage to LGM. Remember, you cannot cover the same month by both LGM-Dairy and MPP-Dairy; it’s against the law. But just next year and never again, you can combine these programs by , e.g. protecting Jan-Apr with LGM, and the rest of the year by MPP.
Today, a farm making 3 million pounds of milk might enroll in MPP-Dairy (the easy FSA program) with 90% of their milk at $7.00 margin protection. They would currently pay $4,539 in fees and premiums, expect payment of $1,380 in 2015, and lose $3,160 in the process. Actually, no matter what coverage level you choose, you’re expected to lose money (based on current market prices) in 2015, starting at a loss of $90 at the $4.00 level and losing $8,529 if you took out $8.00 coverage. MPP is designed so it would have high implied subsidies (expected payments less premiums due) when a year ahead is expected to have low income over feed costs margins. Given currently high expected margins for 2015, MPP is currently not really subsidized for 2015.
But if you switch to the LGM analyzer within the decision tool, the money looks to be in the black.
If you use the tool, realize you’ll need to figure your approximate hundredweights of milk production per month (3 million per year would be 2,500 hundredweights), along with the tons of corn and tons of soybean meal you use per month. Further, you can only cover up to 10 months in advance, and Bozic recommends not doing all 10 months on a single contract.
“I would recommend you take out just 2 or 3 months if using LGM-Dairy, don’t do a 10 month contract,” Bozic explained. “If you buy a 10-month contract, and take $1.00 deductible, then prices would have to fall by $1.00 in all ten months before any payments are due, and you would not get any indemnity check before that long contract expires. It is more robust to buy several LGM contracts with each one covering, for example, one quarter.”
Looking at the LGM-Dairy Analyzer, if you make 2,500 hundredweights, feed 95 ton of corn, and 21.5 ton of soybean meal per month, and cover 100% of your milk for January, February and March at $1/cwt deductible, you would pay just $2,073 in subsidized premium, but have a projected net of $1,913 through just those first three months of the year.
If you want to learn more, read the article referenced above, this FAQ from USDA-RMA (click here for FAQ), or talk to an insurance provider, with a full list provided here: List of LGM-Dairy Insurers.â