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MADISON - Dairy farmers looking to protect the revenue on their operations will have a significant new tool as of October 9. The Dairy Revenue Protection insurance product, which was created under a USDA program, is the brainchild of the American Farm Bureau Federation (AFBF). The organization’s chief economist John Newton made five stops all over Wisconsin this week to explain the product and show farmers how it could work for them.

His first stop was in Madison on Monday, September 24.

Newton has been one of the chief architects of the insurance plan, getting input and insight from state Farm Bureau dairy committees, farmers around the country and USDA officials. He visited with Wisconsin Farm Bureau’s dairy committee three times during the more than two years that the insurance plan was under development.

As he traveled to 20 states last year as part of that working group, Newton said he universally heard that farmers were “not happy” with the Margin Protection Plan for Dairy. That is the federal dairy safety net that was created in the current Farm Bill. As he talked to dairy farmers they wondered why the federal government couldn’t bring back its previous dairy safety net, called the Milk Income Loss Contract or MILC.

Newton, who worked for Senate Agriculture Committee Chair Debbie Stabbenow during the enactment of the current Farm Bill, said the idea in that round was to get rid of any direct payment type of programs and force farmers to have “skin in the game” as they do with insurance-type programs.

One program that farmers have been able to use to cover their risk is the Livestock Gross Margin program or LGM, an insurance-type product that is privately owned. Because that program is available to dairy farmers, it wasn’t possible for Farm Bureau to just make improvements to it and market that to farmers, Newton said.

Several problems he mentioned with the LGM program -- there had been a $20 million cap on the program for the whole industry and that farmers are only able to purchase those policies one day each month. Also, farmers may not participate in the LGM and MPP-Dairy programs at the same time. Newton added that there is a lot of “basis risk” in the LGM program.

In their quest for a better product, they had to invent a new program through American Farm Bureau Insurance Services, Inc. That entity has been submitting crop insurance programs since 1995.

Newton notes that 90 percent of crop policies are revenue-based and when they created this new insurance product, it was designed to offer protection against declines in milk price, milk yield and revenue. It is offered in quarterly coverage and can be sold by insurance agents up to five quarters out, based on futures market prices.

He explained that there are two pricing options – Class III and Class IV and components. The policies are indexed for state-level milk production. In some states where there are very few dairy farms, with the result that there is very little data on cow productivity in that area, certain areas will be grouped together for the purposes of per-cow production.

The program has few coverage deductions, minimum reporting requirements and all dairy farmers are eligible for it.

Premiums are based on “established actuarially appropriate methods,” he said. Whereas farmers were locked into the MPP-Dairy for the life of the current Farm Bill, farmers can opt in and out of this new insurance product as they see fit. “If you want to insure for the spring flush or just for the winter, you can do that,” he said.

Farmers can buy this policy any day – from 3 p.m. until 9 a.m. -- and premiums aren’t due until the end of the policy period. “You don’t have to pay up front.”

There is also no feed component to this program, unlike MPP-Dairy and the LGM program. Newton feels this program will be an improvement over the MPP-Dairy program since coverage levels in the federal program are fixed at an $8. “If margins are $12, you are still at $8.”

The biggest failure, he feels, with that program is that it wasn’t done in an “actuarially appropriate” way. “We fixed that with this program. Policy prices change every day and the prices you’ll be able to protect will change every day.”

The only time a policy wouldn’t be available is in the instance where there is no “price discovery” – no transactions in the futures market that would allow for a price to be determined. Newton said they also won’t offer it on certain days when there are USDA reports coming out that could skew the markets.

They will stop selling the policy for a given quarter 15 days before that quarter begins. Premiums are higher the further out from the target date, because there’s more uncertainty.

Newton also said that this product can allow farmers to choose milk component levels to align with how their milk is priced. The policy can be purchased in increments of .05 percent butterfat.

What the policy cannot do is protect farmers from farm-level production declines that might perhaps result from something like a fire or tornado. It also doesn’t cover pricing problems that result from milk assembly – like excessive hauling or stop charges enacted by a dairy cooperative.

Premiums in this program will be subsidized by the federal government through a law passed in 2014. Ninety to 95 percent coverage will be subsidized at 44 percent; 85 to 89 percent coverage will get a 49 percent subsidy; 75 to 84 percent coverage will get 55 percent subsidy; 70 to 74 percent coverage will get 59 percent subsidies and less than that will not get a premium subsidy.

This is similar to crop insurance, he noted, adding that the new dairy policy is rolling out as a pilot program. “That means we will be able to tweak the policy for things we didn’t think of.”

Officials at the USDA who have worked with Farm Bureau on rolling out this product have told him it is the best program they’ve ever had rolled out under the 508 regulations at the agency.

Newton used an online tool to show prices for various policies and various choice elections and noted that prices will change from day to day.

Organic producers can use this program but they will not be able to figure in their organic premiums to buy policies, he said. “There’s no price discovery mechanism in the organic market and it’s not a transparent market but they could still buy this policy.”

Producers with higher component herds are not disadvantaged by this model, he said, because their milk can be component priced. “The value of the milk is either class or component.”

Background on the economy

The U.S. economy grew 4.1 percent in the second quarter of 2018 and that marks the tenth consecutive year of growth. Unemployment is currently at a 17-year low and the gross domestic product has increased in 35 consecutive quarters. But the farm economy is not booming along with the rest of it.

The USDA predicts that net farm income will be $66 billion in 2018, which is down 13 percent from last year and marks the third lowest farm income in the last 10 years, Newton said. Even with the tariff adjustment payments to farmers from the federal government, this year’s net farm income will be below the 2017 income level.

“Since 2013, net farm income has declined by $58 billion,” he noted.

About two and a half years ago, then-American Farm Bureau President Zippy Duvall kicked off the process that ended up creating this new insurance plan for dairy farmers. “He knew the dairy safety net wasn’t working very well and needed to be fixed,” Newton said.

What Newton called “tariff motivation 101” came in with new policies on trade. The United States ran a $552 billion negative trade balance in 2017. He noted that there have been negative trade balances for the last 50 years, adding that economist don’t all agree on whether or not such trade imbalances are bad or good for our economy.

But he noted that our trade imbalances deteriorated after the North American Free Trade Agreement was signed in 1994.

“The administration thinks we could do better,” he said.

The facts show however, that U.S. agriculture always runs a trade surplus. It was $300 billion last decade. In 2018 – with the tariffs and trade dustups – it is now down to $23 billion.

Meanwhile, farmers are on track to produce record yields of corn and soybeans this year and milk production has broken records for a decade. The agricultural commodities are being hit now with tariffs, he explained, because those are our products that always ran a trade surplus – we sold more of them than we bought from other countries.

That trend seems likely to continue. Milk production stands at 250 billion pounds per year today and predictions show that it’s likely to increase 38 billion pounds per year over the next decade, based on USDA figures and Farm Bureau’s calculations.

Newton thinks that the Trans-Pacific Partnership, the trade agreement with trading partners from around the Pacific Rim and including China, might have been another way to get China to be a fairer trading partner.

Farm Bill impacts

The Farm Bill, which Congress is still working on, proposes changes in fluid milk pricing. An idea from the International Dairy Foods Association (IDFA) and National Milk Producers Federation (NMPF – the dairy cooperative association) is to average the price of Class III and Class IV to arrive at a fluid milk price.

The idea there is to allow processors to have a way to hedge prices on their fluid milk. “If you can manage one of the biggest costs in your business, it would pave the way for more innovation,” Newton said.

The Farm Bill also includes a milk donation program which is intended to help prevent excess milk from being “dumped” and instead get that milk into the hands of hungry Americans. Currently, milk processors who would rather bottle excess milk (after taking the cream out) would have to pay Class I (higher) prices for that milk and if they dump it, the milk is prices as a Class IV product.

If the Farm Bill provision remains, it would include $80 million in the USDA budget for making fluid milk purchases. Asked if there would be processing capacity for all that extra milk, Newton noted that bottling plants don’t run at full capacity all the time.

The current Farm Bill expires on September 30 – and “I don’t think we’re going to get a Farm Bill done this week,” he said. But the current proposals have renewed discussions on milk pricing.

Some sectors of the industry have proposed increasing so-called “make allowances” the credit allowed by federal regulations to manufactures to make products out of milk – it comes out of dairy farmers’ money. Newton notes that there is no other dairy economy in the world that has a make allowance.

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