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Understanding the Margin Protection Program (MPP)

You may have heard complaints from our dairy farmers about the Margin Protection Program (MPP), who say that the insurance program for dairy has been a failure. Let’s take a look at the program, what it was meant to do, and what the problems are.

To be sure, our dairy farmers have had their share of low milk prices, the up and down cyclical nature of prices that the farmers receive for their product, and the high cost of producing milk in the northeast. We covered this part of the story in our January blog (http://www.csg-erc.org/blog/2017/01/16/can-small-northeast-dairy-farms-saved/). And this year many in our region have been hit with unprecedented drought that has stunted the crops needed to feed the herds. On top of this, we have the highly touted new insurance program fail the farmers, which is adding salt to the wounds.

When we were preparing to tackle this blog, we both thought we understood the MPP. However, as we went to put pencil to paper (or fingers to keyboard), we found ourselves having a hard time explaining the program. So we did what we are good at – we set off to research the issue.   There were many explanations being bandied about, all of which were long, obtuse and leaving one scratching one’s head and saying, “Huh?” We need to thank a friend, Jay Phinizy, former USDA–FSA director in NH and Chair of the House Ag Committee, for his patience in making sure we understood the issue. We hope we are able to explain it more simply than most of the attempts we have read.

We will start with a little history. The MPP came about in the 2012 Farm Bill that was actually not finalized and signed into law until 2014. Many in the dairy industry had asked for an insurance program to replace the previous MILC safety net program. Congress wanted to eliminate Milk Income Loss Contract program (MILC), because it was viewed as a subsidy for dairy farmers. In fairness, many of the dairy producers also preferred to pay into a program meant to protect them from either low milk prices or high feed costs, rather than the MILC handout. The insurance program MPP became a reality in the last farm bill, and MILC was repealed. (There are other programs for dairy, but we will concentrate only on the MPP in this article)

So how does the insurance program work – or how should it work? The program on one side of the ledger takes the “all milk price” as the revenue for the program, and uses the Midwest feed price on the Chicago Mercantile Exchange as the expense side of the equation. The difference between the revenue and the expense is the ‘Margin’. As of this writing, those numbers are $17.05 per cwt (a cwt – or hundredweight – is 100 pounds of milk), $7.89 in feed costs to produce that 100 pounds of milk; resulting in a margin of $9.16. The margin is the important number.

The MPP provides insurance that protects the farmer against the Margin falling below a specific level. The farmer needs that Margin to be reasonably high, because they have plenty of other costs to cover, such as heat, electric, labor, taxes, and on and on. You can purchase MPP to protect that Margin from going below $8:00 (the top level) or from falling below $4.00 (the lowest level). You can buy protection in 50-cent increments anywhere between those numbers. The $4.00 is premium free, except for a $100 annual fee. Above that, premiums go up and are based on actuarial data.

Even if you bought the most coverage of protection at the of $8.00 Margin, you would receive no payments because the margin is $9.16. Should milk prices drop by more than a $1.16, feed prices rise by an equal amount, or some combination of the two, the coverage would kick in if you had bought in at the high margin level.

So what is the problem with MPP? There are several. The ‘all milk price’ is a national average price for milk, and the ‘feed price’ is the Midwest price on the Futures Market. Neither of those is reflective of our Northeast region. Milk prices vary in different regions of the country.   The feed cost vary from region to region. This government insurance program is a one-size-fits-all average, and does not vary by region. Therefore, it is not taking into consideration varying cost factors. The MPP also does not consider other cost issues, which also vary by region. We all know that it costs more to operate a dairy farm in New England than it does in Louisiana.

Another problem is that the margins are calculated in two-month increments. Let’s assume you bought in at the $8 margin level.   If the margin calculated for January is $7.50 and in February the margin went back up to $8.52, the two-month average is $8.01 and the farmer would receive nothing. However, if the margins were calculated one month at a time, the farmer would have had a payout for January but not February. Lastly the margins have been relatively steady (in the $9 to $10 range), so there have been very few payouts. Even though dairy prices are extremely low, the Midwest corn, soybean and other grain prices are low as well. As a result, the numbers we hear are that the program has collected $78 million in premiums and paid out $11.2 mil. (Using New Hampshire as an example, only nine of the 101 dairy farms in that state received an MPP payment).

It is clear that the system is not working for the dairy farmer in our region. Congress has just begun its negotiations on the next Farm Bill. We need to make sure the needs of our Northeastern Dairy Farmers are represented. We will be facilitating discussions for members of our region to develop specific wording for changes we seek to the existing MPP subchapter in the Farm Bill (Title 7-AGRICULTURE, CHAPTER \ 115-AGRICULTURAL COMMODITY POLICY AND PROGRAMS, SUBCHAPTER III-DAIRY Part A-Margin Protection).

 

Bob, Tara and Elsie

Can Small Northeast Dairy Farms Be Saved?

There is perhaps nothing more evocative of New England than dairy farms – old barns, contentedly grazing cows, and rolling green fields of corn and hay. However, that iconic vision is in danger of disappearing, to be replaced by mini-malls and subdivisions.

Since 2015, our local dairy farmers have been losing money – in effect paying to milk their cows.   The latest data from the USDA shows that the cost to produce milk in Maine per hundredweight is $25.15 (a hundredweight, or CWT, is 100 pounds, or 8.6 gallons of whole milk). The June 2016 price to the farmers was $16.39, or a loss of $8.70 per hundredweight. With the average herd size of 125 cows, and the average milk production per cow of 2,300 pounds, the total production of 287,500 pounds of milk will mean a loss of $25,012.50 per year.

In Vermont, the number of dairy farms has dropped from 1,200 five years ago to 800 now. In New Hampshire, the number of dairy farms have slipped from 137 ten years ago to the current 100 farms. Thirty years ago, there were more than 10,000 dairy farms in the northeast. Today there are fewer than 2,000.

This is the first in a series of three articles dealing with the dairy crisis. We’ll examine the causes of the crisis and look for solutions.

The Milk Price Roller Coaster

 When we entered the NH legislature in 2006, the state and the region were in the midst of a dairy crisis. At that time, the cost of production was just over $16 per CWT, but the farmer was getting only $11 per CWT for his milk. In 2007 and 2008 the prices rose to decent levels. Another fall in prices occurred in 2009, then back up to highs in 2015.   And now, the lows we are currently experiencing.

What is causing this extreme fluctuation? There are many factors, including the balance of international trade, the speculation in milk futures on the Chicago Mercantile Exchange, and the base price as set by the Federal Milk Marketing Order (or FMMO). Just what is the FMMO? For the past ten years we’ve been trying to get a handle on exactly what it is and who controls it, with no success. Here is a link http://future.aae.wisc.edu/publications/federal_orders.ppt to a Powerpoint presentation that explains the system. (Note:   The Powerpoint is 50 pages long)   No one understands it, and therefore no one knows how to fix it.

What we know is that the costs of production and inputs included in the FMMO formula are not sufficient to cover the real costs that our dairy farmers have to pay. One thing to keep in mind is that the FMMO price is a base price. Processors and retailers are able to pay whatever they would like over and above this base. The problem is they don’t.   The average retail price for a gallon of milk is $4.49. For that same gallon, the farmer receives $1.40, or 31%.

What can we do? One possibility is, working as a region, we can work with our congressional delegations to amend the Agricultural Marketing Agreement and change the FMMOs formulas to take into consideration the high input costs in the northeast.

Your state can also provide your farmers with a safety net of either cash infusions when the prices plummet, or tax credits and/or tax exemptions to allow them to weather the vagaries of federal dairy pricing. Massachusetts, Connecticut and Maine each have set up systems to assist their dairy farmers from these cyclical depressions.

Another way to help is to encourage diversification and innovation for your farms. Cheese and ice cream making, agritourism, timber harvesting, and maple sugaring help to augment the milk income and get farmers through downturns.

Our dairy farmers are a smart and pragmatic breed, used to planning for the bad times when the times are good. We can only hope that they continue to be the stewards of our land and open space.

The next installment of this series will deal with the Margin Protection Program, a newly-established safety net insurance plan that was meant to protect farmers when the price drops below a set level. Unfortunately, this did not work. We will investigate why, and what needs to be done to fix it.

Bob Haefner                                                                                 Tara Sad