It’s been quite some time since dairies made much money. The last Census of Agriculture, which was released by the U.S. Department of Agriculture in 2012, showed a significant loss of dairy farms nationwide. By: Clark Israelsen
The dairy state of Wisconsin, for example, has lost 20 percent of its dairy farms within the last five years. Despite the loss in total farms, Wisconsin still produced a record 30 billion pounds of milk in 2016. A similar thing is happening in most states, Utah included.
The 2014 USDA Farm Bill included voluntary dairy farmer participation in the Margin Protection Program-Dairy (MPP). The purpose of this federal dairy income safety net was to protect the margins between milk prices and the cost of feeds cows eat. Initially a relatively high percentage of the nation’s dairy farms chose to participate in the program. Most of the operations opted for the catastrophic $4-per-cwt coverage level. Less than 10 percent of the enrolled dairy farmers elected to purchase coverage above $4 per cwt. Dairy farmer participation in this program continues to slide and dairy farm operations, even well-managed dairies, continue to go out of business.
MPP has not met the expectations of dairy producers. Though milk prices have continued to decline since 2014, feed prices have been low, too. As such, MPP-Dairy margins did not fall substantially. MPP-Dairy made some payments in the sprint of 2015 and ’16, but these payments did not cover the allocated premiums and administrative costs paid by dairy farmers. The American Farm Bureau Federation estimates dairy farmers paid approximately $100 million in premiums and administrative fees, yet received only $12 million in program payments. MPP-Dairy has simply failed to deliver the protection dairy farmers need and expect.
The American Farm Bureau Federation, American Farm Bureau Insurance Services and some related organizations are lobbying the Federal Crop Insurance Corporation to provide dairy producers with a more flexible program that offers better coverage. Said group is working on a new insurance product called Dairy Revenue Protection (Dairy-RP). This option would be similar to the Livestock Gross Margin Protection Program, currently offered through USDA’s Risk Management Agency and sold by crop insurance providers. This revenue-based insurance option would be quite different from the margin-based option currently available.
Dairy-RP would allow dairy farmers the option of purchasing risk management protection against declines in quarterly revenue from milk sales. Those declines could be caused by unexpected declines in milk prices, unexpected declines in milk production, or both. The proposal would allow dairy farmers to insure the revenue from sales of milk during a particular quarter. They would use futures market prices and expected production to identify expected revenue. From there they would purchase insurance protection on that expected revenue. If the actual revenue happened to fall below that guarantee, the farmer would receive an indemnity payment.
Existing dairy risk management tools use a standardized milk price as the basis for margin protection, but milk is not simply milk. Components differ, cheese yield formulas fluctuate, utilization of a farmer’s milk and markets where sold all impact milk prices. For high-component herds, Dairy RP could more fully capture the dairy farm risk. Dairy-RP would also protect against unexpected declined in milk prices, or state-level milk production that reduces the revenue on the farm during a given quarter.
Under Dairy-RP, a farmer has only four decisions to make. First, dairy producers would determine the milk price based on a mix of Class III and Class IV milk futures prices. The second decision to make is the amount of milk production to cover, which can be from 70 to 95 percent. Third is the level of coverage desired. That can be from 60 to 90 percent of the revenue guarantee.
Finally, which quarterly contracts he or she wished to purchase. Dairy-RP insurance policies would be sold quarterly by USDA-approved insurance providers and could be purchased for an individual quarter or more than one quarter.
Dairy farmers have a huge investment in their operations and need a robust safety net in order to survive downturns. Dairy farmers can learn more about the proposal and provide their comments at farmbureausellscropinsurance.com.
Clark Israelsen is a Cache County Extension agent specializing in agriculture.
Source: The Herald Journal