The freshly-signed Farm Bill is a huge and fundamental change in dairy policy, says Dr. Scott Brown, dairy policy advisor for the 2014 bill. "This is a very different policy than what we have seen in the past," he said.
On Feb. 10, speaking to one of the largest listening audiences for a Hoard's Dairyman webinar, Brown, University of Missouri ag economist, parlayed his extensive understanding of the dairy component of the 2014 Farm Bill into what it means for producers.
The presentation, sponsored by Hoard's Dairyman, was presented in partnership with Jim Baltz, University of Illinois.
Brown applauded Congress for finishing the bill finally signed into law by President Obama on Feb. 7 at Michigan State University. "It has been a very long and winding road", he said, that snaked from hearings in 2010 to a shape-changing, "amazing" home stretch burst of speed.
"It is important for us in the dairy industry to start thinking about this," he told nearly 150 listeners tuned in across the nation. "I think it's a great opportunity for risk management that dairy producers have never had in their toolbox before."
The 2014 Farm Bill gives a new level of flexibility for dairy producers. However, that will require additional homework for producers to optimize their participation in the program. The MILC program will be giving way to a program that includes feed costs and does not impose production cap, with multiple choices for coverage in quantity and margin level.
Brown advised producers to pay particular attention to the final language of how the bill is going to operate. "Erase your knowledge prior to Jan. 1, 2014," he suggested. "There were some important changes, relative to earlier versions."
In addition, USDA rulemaking will be critical. The exact operation of the new farm bill depends on USDA's interpretation of the legislative language, Brown said as a disclaimer. "This is chapter one, the introduction."
The 2014 farm bill creates a "margin protection" program that will allow producers to choose from different levels of protection. It also creates a dairy product donation program that will be used to boost margins when they get exceptionally low.
It repeals the MILC program after the margin protection program is operational, and it repeals the current dairy product price support program and the dairy export incentive program.
The USDA must begin the margin program no later than Sept. 1, 2014. Since dairy producers will be signing up in July and August, Brown's advice is to begin the selection process now.
Basically, for $100 annual registration fee, a dairy producer will be able to get $4 margin coverage for free. That is the bottom line of coverage; it goes up from there.
The margin payment will occur on a bimonthly basis beginning in January/February. It is a national margin calculation involving the U.S. all-milk price minus feed costs. The average cost of feed for a dairy operation required to produce a hundredweight of milk is determined in accordance with a formula that uses the milk, corn and alfalfa prices reported in "Agricultural Prices Report" and the USDA's soybean meal price in central Illinois.
The calculation will use the full month price of the applicable reference month. That means there will be a lag in information since, for instance, the January all-milk price is released at the end of February. "It will take the USDA some time to process payments, so there will be some cash flow issues," Brown noted.
Looking back at bouncing margins, Brown wondered aloud what average margins will look like in the future. Although the industry is looking better with lower feed costs, strong exports and hopes for a good crop year, "this program provides a very firm floor for those producers who want to take advantage of a new risk management tool," Brown pointed out.
He sincerely hopes producers will calculate their margins. "It is important to know your own margin changes over time, relative to the national margin," he said. "I am interested in month-to-month movements of each."
The higher the correlation between a producer's margin and the national margin, the better the safety net, he said. "Take time to do the comparison."
Rather than an insurance program, Brown said the new program should be considered another of a dairy farmer's risk management tools. "Use this to protect risk as best you can," he advised.
Dairy producers will be assigned a production history that will be their highest annual milk marketings during 2011, 2012 or 2013. The USDA will adjust a producer's history annually to reflect an increase in US milk production. There are tracks included to get new producers on board, he noted.
Since higher premiums will be paid for higher margins, the question is how much coverage producers want to pay for. Each year, they can pick between $4 and $8 margin coverage levels at $.50 intervals, with different premium rates for each level. There are also different premiums for the first 4 million pounds of milk and for above 4 million pounds.
In 2014 and 2015, the premium rates for the first 4 million pounds will be reduced by 25 percent at all levels except at the $8 coverage level. A producer will also pay $100 annually in administration/registration fees, Brown reminded listeners.
Each producer must decide what the "best" margin protection level is for their level of production. "I think this is one where we're going to see year by year changes, depending on what folks think the markets going to do," he said.
It also depends on how much risk each unique dairy operation can or is willing to afford.
The program protects more than margins. Annually, dairy producers can cover production history by picking between 2 and 90 percent of production history in 5 percent increments. "This creates interesting trade-offs between coverage level and coverage quantity," Brown observed.
If low margins are expected, for instance, a farmer might opt for high coverage levels and quantity. In a reasonably good margin year, he may choose to reduce the coverage quantity or use other tools, like futures markets. All those choices are there, he noted.
"We wanted flexibility in this margin program from the beginning and, I'll tell you what, I think producers got a lot of flexibility," Brown said.
He anticipates there will be many in the academic world providing calculators to help farmers make the best decisions. "They won't be telling you what choices to make, but things to think about as you make those choices," he predicted.
The new dairy donation program must be operational no later than 120 days after the margin program begins. It kicks in when the margin is less than $4 for the two preceding months.
The secretary purchases dairy products at prevailing market prices and distributes them to public and private nonprofit organizations assisting low income households. Unlike former dairy product price support programs, the secretary will not take possession or hold stocks of product. "You'll never have to worry about product coming back on the market," Brown pointed out.
The program has four off switches, including suspension after three months of operation or when margins go above $4.
The USDA will now interpret the law with regulations that should clarify program operation. Brown is looking forward to seeing the specific implementation rules the Secretary will put out. "It will be very interesting," he said."Stay tuned."