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From The MPC Newsletter
Friday, January 31, 2014

Final Farm Bill Agreed On By Key Negotiators; Now Moving Through Congress
By Rob Vandenheuvel, General Manager

After several years of hearings, debates and false starts, a new five-year Farm Bill finally appears to be on the verge of becoming law.  The House of Representatives has already approved the compromise legislation by a vote of 251-166.  The agreement is now in front of the U.S. Senate, which is expected to vote on the issue very soon.  Assuming they approve the bill as well, it moves to the President for final signature into law.

So what does the bill do for U.S. dairy farmers?  We’ve already discussed some of what it does NOT do in recent issues of this newsletter.  The bill does not create a Dairy Market Stabilization Program that would create incentives to temporarily cut back milk production when our on-the-farm margins drop below certain levels.  But what the bill DOES do is replace the Milk Income Loss Contract (MILC) and Dairy Price Support programs with a new “Margin Protection Program” (often referred to as a “margin insurance program”). 

The National Milk Producers Federation (NMPF) has put together a three-page summary of the dairy provisions, which can be found at: http://www.milkproducerscouncil.org/2014farmbilldairy.pdf.  In short, the new program, which is slated to begin no later than September 1, 2014, would create a new Margin Protection Program that would:

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Calculate a “national feed cost” based on reported prices for corn, soybean meal and alfalfa, and compare that cost to the U.S. “all-milk price,” resulting in a monthly announced milk-price-over-feed-cost margin (we’ll be discussing this calculation in more detail in future issues of this newsletter).

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Provide an opportunity for any individual dairy to protect a portion of their production at a certain margin level.  Dairies can choose to protect from 25%-90% of their “production history” (which is determined by the highest of your dairy’s 2011, 2012 or 2013 annual production).

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Dairies can also choose to protect as little as $4.00 in milk-price-over-feed-cost margin or as much as $8.00.  The higher the margin, the higher the premiums a dairy must pay (table below).

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A reduced premium is available on the first 4 million pounds of milk that every dairy produces per year. 

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Coverage Premium options in the Margin Protection Program:

Production Under 4 Million Pounds

Production Over 4 Million Pounds

Coverage Level

Premium

Coverage Level

Premiums

$4.00

None

$4.00

None

$4.50

$.01

$4.50

$.02

$5.00

$.025

$5.00

$.04

$5.50

$.04

$5.50

$.10

$6.00

$.055

$6.00

$.155

$6.50

$.09

$6.50

$.29

$7.00

$.217

$7.00

$.83

$7.50

$.30

$7.50

$1.06

$8.00

$.475

$8.00

$1.36

In future issues of this newsletter, we’ll delve into more detail about these protection options.

So what should we make of all this?  It would be easy to be disappointed by this Farm Bill, particularly for those of us who have been fighting hard to include the Dairy Market Stabilization Program.  But as this is going to be the new law of the land for the next five years, let’s take a look at the positives to take out of this.

When you look at the last five years – particularly the challenging periods in 2009 and 2012 – U.S. dairy producers have borne virtually all the financial risk associated with the ups and downs of the dairy industry.  What do I mean by that?  If you look at the impact that low milk prices have on producers, processors and taxpayers, you see that when the milk prices plummeted in 2009:

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Processors continued to get the milk they needed, with an available margin, courtesy of end-product-pricing and the make allowances in California and the Federal Orders.  They got their milk whether the dairy farmer selling them the milk was making money or losing it.

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Taxpayers had some financial liability due to low milk prices, as the MILC program made some payments.  But given the limited milk volume on which the program pays out, that liability was nothing compared to the loss in equity on the farm.

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Producers, on the other hand, felt the brunt of the downturns, producing milk at a loss month-after-month, forfeiting billions of dollars in hard-earned equity, and witnessing thousands of dairies exiting in the industry due to the financial challenges.

So how does this new Farm Bill start to change that equation?  Processors continue to be protected, but taxpayers are now on the hook for a much larger potential liability if dairy farmer margins drop.  Every dairy in the U.S. – regardless of size – has the opportunity to get government-subsidized margin protection on up to 90% of their production.  So when dairy margins drop, the government payments won’t be limited to just the 2.985 million pounds that the MILC program paid out on.  Their exposure will be exponentially larger than that.

Of course, regular readers of this newsletter know that the Dairy Market Stabilization Program was designed to help spread some of this price risk to processors as well, and in doing so, reduce the exposure that taxpayers have.  Under that proposal, when margins dropped and the government started making margin protection payments, the Market Stabilization Program would have given each participating dairy a direct financial incentive to temporarily cut back milk production (a processor’s worst fear), thereby helping to quickly realign supply and demand.  This result would have been good for producers (who would be able to get back to a market balance that provides a profitable price) as well as for taxpayers (since a return to supply/demand balance would shorten the periods they were making margin protection payments).

In the end, the decision was made – largely due to the demands of House Speaker John Boehner – that the government was comfortable assuming the additional financial liability that comes with a margin protection program that has no provisions aimed at restoring supply/demand balance.  In five years, when this program is up for renewal, we’ll have an opportunity to evaluate whether that was a wise choice or not.  In the meantime, we operate in an industry that now exports about 16% of our production, and is therefore vulnerable to global shifts completely outside of our control like dollar valuations, global weather patterns or political unrest.  We all hope for the best, but it is a very positive thing to have some of our downside price risk shared beyond just the 50,000 U.S. producers.

 

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