When it comes to risk management it seems like things are never simple. The new approach in the farm bill appears complicated. However, farms that have developed cash flow plans on their own or with the Extension Dairy Team, already have the tools available to implement the program effectively.

Deriving the Margin

The Margin Protection Program (MPP) in the Dairy Title of the Farm Bill uses a ration (Table 1) described with market prices for corn, soybean meal and alfalfa hay that was developed by the National Milk Producers Federation (NMPF) in conjunction with prominent dairy nutritionists. The ration incorporates all animal groups including the lactating and dry cows as well as heifers. The ration is based on a 1,000-cow herd milking 68.85 pounds per day with an 80% replacement ratio.

# Head Total DM Lbs/Day Corn Silage Shelled Corn Soybean Meal Alfalfa Hay
% of total DM
   Milking Cows 819 47.1 34% 32.7% 12.1% 21.2%
   Hospital Cows 17 40 34% 32.7% 12.1% 21.2%
   Dry Cows 164 24 50% 5% 15% 30%
   Total Milking Cows 1000
   Heifers expected to calve within 1 year 394 23 50% 5% 15% 30%
   Heifers 500 lbs or over 203 15 50% 10% 15% 25%
   Heifers <500 lbs 203 7 45% 25% 15% 15%
   Total Replacements 800
Total Herd 1800

Source: NMPF, National Milk Producers Federation, 2010.

Using this ration, the coefficients making up the final national margin formula are calculated based on the ration quantities of each ingredient for each animal group. The national all-milk price and shelled corn and alfalfa hay prices will be determined by the Agricultural Price Report from USDA National Agricultural Statistic Service (NASS). The soybean prices will be based off of the Central Illinois Soybean Processor Report from USDA Agricultural Marketing Service (AMS).

The final margin formula is:
All Milk Price - (1.0728 × Shelled Corn Price/bu + 0.00735 × SBM Price/ton + 0.00137 × Alfalfa Hay Price/ton)

This margin is used to determine the level of support producers enrolled in the MPP will receive based their elected coverage. The following section considers theoretical implementation of the MPP comparing to the Penn State dairy herd’s margins during 2009 and 2012.

Read full story from the Penn State Extension College of Agricultural Sciences.