U.S. dairy margin insurance programs offer pros, cons

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The two competing margin insurance programs being debated as part of the dairy subtitle of the 2013 Farm Bill both offer pros and cons for dairy farmers, based on the individual farm characteristics, according to a pair of Ohio State University agricultural economists.

In a new report released last week, Cameron Thraen, an associate professor in the Department of Agricultural, Environmental and Development Economics (AEDE) in Ohio State University's College of Food, Agricultural, and Environmental Sciences, and doctoral student John Newton, discuss the two programs to provide clarification and insight into both without taking a side on either.

The report takes an in-depth look at the Dairy Security Act, with its margin insurance paired with a dairy market stabilization program, and the Goodlatte-Scott Amendment, which offers a margin insurance program without the dairy market stabilization program.

The goal is to provide a detailed look at a highly complex topic as a way to offer advice to producers, stakeholders and policy leadership, said Thraen, who also holds an appointment with the Ohio Agricultural Research and Development Center (OARDC).

OSU Extension and OARDC are the statewide outreach and research arms, respectively, of the college.

The report takes into consideration a number of factors, including a dairy farm's anticipated growth pattern and expected market prices for milk and feed. It then evaluates each program regarding which would be best for different dairy operations, he said.

"The dairy industry is not homogenous at all, so we're not trying to settle the debate on which program is best overall because you're not going to," Thraen said. "The language in both programs may appear to be very straightforward, but interpreting the programs, each with its unique set of rules and triggers operating within a complex dairy economy is a challenging assignment.

"The report seeks to disentangle the devil in the details for both programs."

Thraen and Newton released the report with a group of agricultural economists as part of an ongoing research and extension education program known as the Midwest Program on Dairy Markets and Policy: 2013 Farm Bill Dairy Analysis Group. The program is supported by a consortium of dairy economists from Midwest U.S. universities who specialize in dairy policy.

In addition to Thraen and Newton, also contributing to the report were Marin Bozic of the University of Minnesota; Christopher Wolf of Michigan State University; and Mark Stephenson and Brian Gould from the University of Wisconsin.

The report addresses several key aspects of the competing safety-net proposals, including: the extent to which each of the provisions offers effective catastrophic risk insurance; whether they are actuarially fair, with premiums collected that offset liabilities paid out; what each program would cost a dairy; and if they present long-term obstacles to the growth of farms wishing to expand, Thraen said.

The researchers analyzed a variety of participation scenarios with varying levels of feed cost and milk pricing and found that the DSA and G-S provide an effective financial safety net for farmers as they both offer catastrophic risk and shallow-loss insurance and help enhance farm revenue by providing effective protection against ruinous low margins.

"While the intent of the two programs, to provide an effective and affordable income safety net, is the same, the mechanisms to achieve this are different," Thraen said. "The title of the report (Shared Potential, Shared Concerns and Open Questions) captures the essence of our conclusions.

"These programs have shared potential, shared concerns, and leave open questions."

The group is also developing an online decision tool to allow dairy farmers to weigh the benefits of participating in the final program in the next Farm Bill. The interactive tool, which will be launched as soon as there is a definite program, will help farmers to determine which level of supplemental insurance would provide the most benefit for their operation and at what cost, Thraen said.

The full report can be viewed at http://go.osu.edu/thraendsa.

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Batavia, NY  |  April, 24, 2013 at 09:25 AM

Why are there only two choices of margin insurance for the Farm Bill. There should be a third option. No taxpayer funded margin insurance. Dairy farmers should provide their own margin insurance just like any other insurance that people provide for themselves. I recommend self insurance by not borrowing too much, expanding beyond reason and not spending all your money when the margins are good. I know this is basic advice that any business should follow, but it seems that too many dairy farmers do not understand this and want someone else to pay

MA  |  April, 29, 2013 at 05:58 AM

We already have such a great program, Ken. It is called Livestock Gross Margin Insurance. we bought into it at the first opportunity, because we feared another 2009. At the end of the year we did not have the money to pay up. Yes, we did pay, but that money was needed in several other places....so we are not buying insurance. I resent having to buy insurance, no matter who pays, just to protect myself from others who produce more than their share. Insurance is for natural disasters, not for protection from financial ruin inflicted by the dairy industry on itself....

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