The passage of the farm bill in February marks the largest shift in U.S. dairy policy in the last 70 years. The legislation represents a radical departure from dairy price supports and reliance on government.
Most notably, dairy price supports and supply management are gone and the milk income loss contracts (MILC) program will end on Aug. 31, 2014. In their place, the U.S. Department of Agriculture will provide one-size-fits-all dairy margin insurance for all producers, regardless of the size of their operation. Or dairy farmers can purchase more personalized livestock gross margin (LGM-Dairy) insurance for as long as LGM subsidies last. But producers can’t sign up for both of them.
As Jim Dickrell, Dairy Today editor, so appropriately penned, “As farmers contemplate whether to sign up for either program, they are enjoying record milk prices, soaring dairy exports and the promise of lower feed costs as new crops are harvested this year. However, they still face plenty of uncertainty: weather, regulations, immigration issues, infrastructure and even rebounding interest rates as the U.S. economy slowly recovers from recession. Those dairy farmers who choose to go it alone or opt for minimal levels of margin insurance will now be at the mercy of global markets.”
So the 930-page farm bill (which grew to more than 2,000 pages due to amendments from previous legislation) will be not ready for some time in what likely will be in excess of 20,000 pages of implementation rules and program handbook guidelines. And, as the economists who are following this will tell you, lots of unanswered questions remain.
For the portion that pertains to dairy farms, the provision that farmers can participate in the new margin insurance program or LGM-Dairy already is complicated because some producers might have LGM-Dairy contracts that cover September and October. If a margin insurance program starts Sept. 1, what does that mean when margin insurance is available?
Although this insurance likely will not be needed this year because of the higher milk prices, the USDA's Farm Service Agency announced March 31 that the MILC program will be extended through Sept. 1 as the details of the new farm bill are being worked out. Federal FSA Administrator Juan Garcia announced last week that contracts for eligible producers enrolled in MILC automatically will be extended until the termination date of the program and margin insurance becomes available.
Looking ahead, dairy farmers will have to calculate their basis for milk and feed (the difference between national and local prices) to determine what the margins actually insure, says Brian Gould, a dairy economist with the University of Wisconsin. In addition, the margin insurance calculation is based on a whole-herd ration, covering milking cows, dry cows and replacements. What happens if a farm does not raise replacements? How does that affect the margins he or she is insuring?
Here are some even more basic questions:
- Will sign-up be annual or for the entire five years?
- If it’s annual, can farmers switch back and forth between margin insurance and LGM-Dairy?
- When will sign-up deadlines be?
- When will premiums be due?
- How quickly will indemnities be paid?
Marin Bozic, assistant professor of dairy foods marketing economics at the University of Minnesota, spoke recently at the Central Plains Dairy Expo about a decision aide to which he and others are contributing. Bozic shared with the audience what is known so far about the farm bill and noted that dairy producers can choose the level of margin protection, from $4 to $8 per hundredweight in 50-cent increments.
The insurance also would have separate premium levels for the first 4 million pounds of milk produced by a single operation within a given year, with a different premium level for milk produced above that level.
With milk prices projected to be at or near record highs throughout most of 2014, Bozic doesn't expect payments to be issued during this calendar year, but you still should position yourself with what the program has to offer. The level of protection, however, is your choice.
An application is being developed by Mark Stephenson, director of dairy policy analysis at the University of Wisconsin-Madison, and John Newton, a dairy economist with the University of Illinois. This online decision tool will help producers work through difference scenarios. The tool will be available at.
The new farm bill also includes a dairy product donation program, which allows the government to purchase surplus cheese and other dairy products and donate them to charity to stimulate the market when prices are depressed.
So 2014 is going to be an interesting year for dairy, as well as all of agriculture. Educational efforts are being planned and will be announced as details become available. Unfortunately, this may not be the most opportune time (during spring work) to think about insurance. Nonetheless, you may not have a choice if you want to participate. Every indication so far is that you will. Stay tuned.