Relative to program preference, we find that with a $6.00 MILC-Insurance program smaller farmers would elect to remain in the MILC program compared to the IOFC program. The reason small farms may elect MILC over margin insurance is the MILC is a no cost to participate program; thus even if margin indemnities are higher than MILC payments, after paying premiums MILC benefits are actually higher than IOFC insurance indemnities. When $6.50 coverage is offered the expected benefits of IOFC exceed those of a MILC program ($4 million pound cap). This pattern of preferring MILC to IOFC insurance does not continue as the herd size grows. The reason large farms would prefer the margin insurance over the MILC during poor margin outcomes is the 4 million pound benefit constraint results in the effective revenue support per cwt dropping as farm size increases.
Results indicate that the MILC-Insurance program would provide benefits to both small and large dairy farm operators by allowing them to choose their safety net annually. This new alternative would provide greater support to small farmers compared to the existing MILC program by expanding eligible pounds. For farmers growing a majority of their feed the target price MILC program provides a safety net to their primary revenue risk - milk price. For larger dairy farms (and farms who purchase feed) the IOFC program provides the ability to mitigate both milk and feed price variability. Thus the opportunity to participate in one or the other provides a continuous safety net program in any IOFC environment for all dairy farmers.
From fiscal perspective, this program would also reduce the costs by as much as 60% compared to DFA if IOFC coverage from $4.00 to $6.00 is offered. These cost savings fall to just under 40% when $4.00 to $6.50 coverage is offered. Finally, by offering insurance coverage only up to $6.50 a stand-alone margin insurance program may not mute market signals implicit during low IOFC margin events compared to an $8.00 insurance option. By directing market signals to the dairy farmers they can respond to negative price signals not by liquidating their herd completely, but by reducing output. A slight reduction in output, while supporting dairy farm revenue with $6.50 insurance coverage, would provide dairy farm stability and serve to prevent rapid declines in the U.S. milking herd similar to those witnessed in 2009.
As means to end the stalemate between supporters of the House and Senate dairy titles we propose serious consideration on a new dairy safety-net program. This program will: (i) work for small and large-scale dairy farm managers alike; (ii) be fiscally responsible, providing more support than the current MILC yet costing significantly less than the currently debated programs; and (iii) does not mute market supply and demand signals. This new policy alternative which we title MILC-Insurance would accomplish all of these goals by increasing eligibility of MILC to 4 million pounds per fiscal/calendar year and by allowing farms an option to choose annually between MILC and a stand-alone margin insurance program as their elected safety net.
The MILC-Insurance program saves money relative to the stand-alone margin insurance program by capping insurance at $6.00-$6.50 per cwt. With the savings the revenue can be redirected to an expansion of the MILC program; effectively offering the best of both programs (counter-cyclical revenue support or catastrophic margin insurance). Farms would no longer have an incentive to opt-out of the margin insurance and would instead opt for the no-cost MILC program when anticipated margins are favorable. This would allow all farms, regardless of size or management style, to participate in a government sponsored safety net program. Such a program, which offers continuous support, may prevent ad-hoc disaster payments in the future.