Farm Bill 2014: The Dairy Title

The 2014 Farm Bill is officially in the books. While there are a few rules and regulations that have yet to be written, we now know the bulk of what the farm bill has to offer. In terms of dairy policy, there is a new program about to be rolled out called the Margin Protection Program. But before going into detail about that program, I want to mention what will be phased out over the course of the next several months. The Dairy Product Price Support Program, the Dairy Export Incentive Program, the Federal Milk Marketing Order Review Commission, and the Milk Income Loss Coverage (MILC) are all eliminated in the 2014 Farm Bill. The MILC program will be phased out by September 1, 2014 or when the Margin Protection Program is up and running, whichever comes first. The programs that are either new or are renewed from the previous Farm Bill include the new Margin Protection Program, the new Dairy Product Donation Program, the renewal of the Dairy Promotion and Research Program, the renewal of the Dairy Indemnity Program, and the renewal of the Dairy Forward Pricing Program.

The Margin Protection Program is the biggest dairy program in the 2014 Farm Bill. It is a safety net program that pays out when the actual dairy margins fall below a producer selected coverage level. The program will be established no later than September 1, 2014 and is open to all dairy operations, regardless of size. There is a $100 administration fee due upon sign-up, and producers can choose a coverage level that guarantees a margin of between $4.00/cwt and $8.00/cwt. Producers can also choose to cover between 25% and 90% of their production history. A producer’s production history is defined as the highest production level from 2011, 2012, and 2013. If a producer is trying to grow his/her operation, he/she can increase their production history annually by an amount no greater than the national annual average growth in production.

The margin is defined as the difference between the “all milk price” and the “average feed cost.” The all milk price is the average price received for a cwt of milk by all dairy operations for all milk sold to dealers in the U.S. The price is reported monthly by the USDA in the Agricultural Prices Report released toward the end of each month by the National Agricultural Statistics Service (NASS). The average feed cost is the average cost of feed used by a dairy operation to produce a hundredweight of milk and is intended to include the feed cost of both lactating cows as well as dry animals in the herd. The average feed cost is defined as 1.0728 times the price for a bushel of corn plus 0.00735 times the price for a ton of soybean meal plus 0.0137 times the price of a ton of alfalfa hay. Each of these prices are monthly average national prices. The corn price and the alfalfa price are reported in the monthly Agricultural Prices Report released by NASS, while the monthly Soybean Meal price can be found at the bottom of the daily Central Illinois Soybean Processor Report released each day by the Agricultural Marketing Service (AMS). Any payments under the Margin Protection Program are triggered by this calculation and are independent of an individual producer’s margins.

Producers will need to sign-up annually for the program and will have the flexibility to choose a different coverage level each year. As mentioned above, there is a $100 administration fee to sign up for the program in addition to the premium for the coverage. The premiums are shown in the table below and will not change over the course of the current farm bill. There are two sets of premiums, those for producers with more than four million pounds of annual milk production and those for producers with less than four million pounds of production. In addition, there will be a 25% reduction in the premium rate for producers with less than four million pounds of production for 2014 and 2015. The rate reduction is intended to encourage smaller producers to sign up. Producers with more than four million pounds of production will have their rates pro-rated based on their production level. In other words, the proportion of their production that is insured under each rate will be equal to their proportion of production that is over/under four million pounds. For example, a producer with six million pounds of production will have two thirds of their covered production charged at the lower rate and one third of their covered production charged at the higher rate. The total premium for the Margin Protection Program is calculated as the coverage percent multiplied by the production history times the premium per hundredweight as show below.

Premium Paid = Coverage % * Production History * Premium/cwt.

Coverage Level Premium (Under 4 Million Pounds) Premium (Over 4 Million Pounds)
$4.00 None None
$4.50 $0.01 $0.02
$5.00 $0.025 $0.04
$5.50 $0.04 $0.10
$6.00 $0.055 $0.155
$6.50 $0.09 $0.29
$7.00 $0.217 $0.83
$7.50 $0.30 $1.06
$8.00 $0.475 $1.36

Under the Margin Protection Program, payments will be made on protected production any time margins averaged over two consecutive months falls below the selected coverage level. As shown below, the payments will be equal to the difference between the coverage threshold (the coverage level for which a producer is paying) and the actual margin multiplied by the coverage percentage (25% to 90%) multiplied by the production history (in cwt) divided by six. The production history is divided by six under the assumption that a two-month period is equal to 1/6 of a producer’s annual production.

Payment = (Coverage Threshold – Actual Margin) * (Coverage %) * (Production History/6)

While many of the details surrounding the Margin Protection Program are known, there are still several rules that have yet to be written. All rules for this program must be written by September 1, 2014. Among those rules include details on sign-up periods and payment timelines. There are also several things to think about before signing up. First of all, it is important to remember that the margins covered do not include fixed costs as well as costs such as labor, veterinary expenses, or utilities. It is also important to remember that payments are triggered on a national margin, not an individual producer’s margins. These things should be included when deciding optimal coverage levels. It should also be noted that a producer cannot participate in both the Livestock Gross Margin Program and the Dairy Margin Protection Program. For more information on the Dairy Title in the Farm Bill, click this link: Dairy Farm Bill.