High points of the new farm bill for dairy farmers
The new 2018 Farm Bill is very attractive for dairy producers. There are five main highlights to know.
1) Margin Protection Program for Dairy is discontinued
2) Dairy Margin Coverage is introduced
3) Low premiums and expanded coverage levels from $4 to $9.50 with discounts for consistent use
4) Partial rebates of net MPP premiums paid for 2015- 2018 period
5) No restrictions on combining crop insurance and title I programs (LGM and DMC or DRP)
On the first five million pounds of production (Tier 1) the $9.50 level premium is $0.15 with 25 percent reduction if you sign up for all five years ($0.11). There is only the annual fee for Tier II production.
Producers are asking—what is my milk price floor with Dairy Margin coverage, even though the program does not actually create a milk price floor. But consider, the best estimated forecasted DMC feed ration cost in 2019 averages $8.55, the range is $8.45 to $8.68. If a dairy producer chooses $9.50/cwt coverage, that translates to $8.55+&9.50= $18.05/cwt national average all-milk price.
Since producers look most closely at the Class III milk price and since 2015 the U.S. all-milk price was $1.40/cwt higher than Class III milk price; therefore, approximate Class III price floor with DMC at $9.50/cwt would be $16.65/cwt ($18.05-$1.40=$16.65). If your estimated basis is $1.50 over Class III, then with DMC your floor is $18.15/cwt ($16.65 +$1.50 =$18.15. You then have to deduct the premium paid for the insurance and you have a protected price of $18.00/cwt ($18.15- .15=$18.00).
This results in some payments when your milk price falls below $18.15/cwt. Will this make you good if your cost of production is $18.50? No, but if you complement DMC or DRP with LGM, the combined payouts will suffice to cover your cost of production. This farm bill allows you to use DMC plus DRP or LGM on the same pounds. The focus is not profit, but it focuses generally on cost of production. This makes knowing your cost of production even more important.
How will these new options impact milk markets? If farms use these options and stay producing, then who will clear the market of the production? Maybe producers in other countries, then other U.S. dairies? Maybe fragile dairies or dairies with higher costs of production because of past management decisions and high labor costs?
Certainly, this could sadly extend a dairy recession, helping individual producers but reducing risk leading to a possible increase in supply—barring positive changes in domestic consumption and exports.
This emphasizes the need to put in risk management for 2019-2020. Producers will receive the highest benefits with Tier I at $9.50 and Tier II at the $4.00 level, especially if signed up for all five years. Another provision allows producers who paid premiums in MPP and did not receive indemnities equal to their payments, to apply up to 75 percent toward the premiums of the DPR.
Hall is the Iowa State University Extension and Outreach Dairy Specialist