Last week, the National Milk Producers Federation sent a letter to USDA Secretary Tom Vilsack requesting that the September 30 deadline for the Dairy Margin Protection Program be extended 60 days.
NMPF cited the busyness of the fall harvest and other relatively innocuous reasons for the extension request. Left unstated is dairy farmer disgruntlement with the program, and its failure to pay out indemnities even though milk prices fell some 30% last year.
An extension to November 30 would allow farmers more time, obviously. But it would also give them a better read on futures markets, and the likelihood of indemnities being paid. This is precisely what Congress wanted to avoid when it passed the 2014 farm bill.
The fear then was that allowing farmers to sign up just weeks before the next year’s program went into effect would allow farmers to milk the U.S. Treasury. There was real concern, since farms of all sizes can now participate, that government payouts could reach billions of dollars.
The reason Congress passed the Dairy-MPP, and the reason NMPF developed and supported it, was to give dairy farmers another risk management tool. Though other tools are available through futures and options, the size of these contracts don’t always work for smaller dairy farmers. Plus, they can be expensive or limit upside milk prices if fence strategies are used.
The Dairy-MPP fixes that. Dairy farmers counter that the program uses national milk and feed prices, and so the income-over-feed-cost margins don’t match up well in some regions. But regionalizing the program was a non-starter, even within NMPF. Having the program pay indemnities in some regions while not doing so in others was politically untenable.
Dairy farmers are now operating in a whole new world, governed and driven by world market conditions. If you don’t believe so, look to New Zealand or Europe. Both are now dependent on world markets for their milk prices. New Zealand, with its small domestic population, lives and dies with world prices. Europe has a large population of dairy consumers, but even it went cold turkey when it did away with dairy quotas April 1. European governments have since announced nearly a half billion dollars in direct payments to dairy farmers, less than six months after quotas disappeared.
The U.S. Congress will be far less willing to provide direct payments now that farmers have the Dairy-MPP program available. Dairy-MPP was designed as a risk management tool, and should be used as such. If USDA again extends the deadline, as it did last year, it effectively will train farmers to use the program only when there’s a high likelihood of payout. That is not risk management.
Marin Bozic and Chris Wolf, agricultural economists with the University of Minnesota and Michigan State, respectively, have created a user’s guide for their Dairy Margin Protection Program (MPP) stress test calculator.
The calculator allows dairy farmers to enter variables such as herd size, milk production, current risk management plans and working capital. The spreadsheet then calculates risk and what MPP options might be best for their operations.
Dairy farmers who are serious about risk management should use the calculator to see if the Dairy-MPP makes financial sense for their operations. Perhaps it does; maybe it doesn’t.
Participating in the Dairy-MPP only when there is a high likelihood of payout is like buying fire insurance and hoping the barn burns down. Who would do that?
