Dairy revenue protection An insurance option for dairy producers | Insurance | Michigan Farm News

Dairy revenue protection: An insurance option for dairy producers?

Category: People, Livestock

by Dennis Rudat

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“MPP really has not served as an effective risk management tool for a number of dairy farmers.”

Odds are pretty good you won’t find a dairy farmer in business today who feels the 2014 farm bill’s Margin Protection Program (MPP) has lived up to it’s so-called “safety-net” billing. In fact, American Farm Bureau Federation’s (AFBF) Director of Market Intelligence, John Newton said the “dairy safety net is broken.”

In comments to the Michigan Farm Bureau’s Dairy Advisory Committee, he said optional buy-up protection in the three-year old MPP has plummeted from 39 percent in 2015 to a dismal 2 percent in 2017.

“MPP just hasn't lived up to expectations,” Newton said. “Growers have paid about $100 million in premiums into the program, while they see milk prices drop by about 50 percent since 2014. Meanwhile MPP has only paid about $12 million back in the form of program payment. So MPP really has not served as an effective risk management tool for a number of dairy farmers.”

He advised dairy producers that simple solutions, such as adjusting the 10 percent feed ration or changing sources for feed prices, once tallied, all carry a very hefty price tag – as much as $5 to $9 billion dollars, according to Congressional Budget Office calculations.

“The biggest challenge is money,” Newton warned. “In this current budget environment that's going be a real heavy lift, given that there a lot of other commodities that also need additional assistance in this next farm bill.”

According to Newton, about 80 percent of the farmers that are enrolled in MPP are producing less than 4 million pounds of milk a year - representing only 17 percent of the milk that's in the program. He said the AFBF Farm Bill Working Group has been working on ways to enhance MPP for producers of less than 4 million pounds to make it a more effective risk management tool.

Calling it a two-tiered safety net approach, Newton said the ultimate goal would be to enhance MPP with an emphasis on making it more effective for smaller farms through lower premiums for the first 4 million pounds of milk, while also improving access to market-based risk management tools for larger dairy operations through a new dairy revenue-protection based insurance product.

“AFBF and American Farm Bureau Insurance Services, Inc. (AFBIS) have been working collaboratively to develop that product,” Newton said. “Conceptually, each dairy farm would have an opportunity to cover their expected revenue for each quarter up to four quarters in advance - revenue being their milk price multiplied by the amount of milk that they want to cover. If their actual revenue falls below that revenue guarantee, they get payment.”

Newton told Michigan dairy producers the insurance concept was submitted to the Federal Crop Insurance Corp. for review in May, and it promptly approved the proposal to go out for external review.

“We’re still waiting feedback, but we continue to build out the policy for submission in the fall for a full insurance product,” Newton said. “We still have a lot of work to do in developing the product, and we got some really good input from members here in Michigan on things we may need to consider as we continue to develop the product, but assuming we meet that fall deadline and in its approved sometime in 2018, we hope to be able to deliver this to the market.”

Saying a one-size doesn’t fit all in dairy production, Newton noted the Revenue Protection insurance product shouldn’t be viewed as a replacement for MPP or LGM, but as another tool in the toolbox that lets dairy producers choose which risk management tool works best for them.

“MPP and LGM are both designed to cover the difference between milk price and feed cost,” Newton said. “With this revenue protection insurance product, we’re thinking about managing the risk in covering large declines in the milk price or changes in production that may reduce a dairy farmer’s revenue.”

For Michigan dairy producers, Newton acknowledged the revenue protection insurance option may need some additional modifications in addressing concerns he heard from the MFB Dairy Advisory committee regarding basis risk in the form of lower producer price differentials.

Even so, he contends an insurance-based risk management tool that requires producers to have skin the game via producer premiums, may be the best option, long-term, in providing dairy producers an actuarially sound safety net that would also survive budget challenges in future farm bill negotiations.

“We’re going continue to see attacks on the farm bill, and this is an opportunity for dairy to become a bigger portion of the crop insurance coalition as we continue to negotiate the 2018 Farm Bill,” Newton said. “The crop insurance coalition is a very important coalition for protecting these important safety net programs for farmers.”

You can read more about the Farm Bill at Michigan Farm Bureau.