Following a well-deserved black eye for the dairy industry’s so-called “safety net,” Congressional efforts to improve the Dairy Margin Protection Program (MPP) appears to be helping. With a dairy economy in the midst of multi-year losses, more than 21,000 dairy operations nationwide were motivated to enroll for the 2018 coverage year.
According to Michigan Farm Bureau Livestock Specialist Ernie Birchmeier, USDA is expecting that number to increase once producers complete final touches on their enrollment applications.
“Once final enrollment is tallied, it’s anticipated that more than 50 percent of the licensed dairy operations in the U.S. will be participating in MPP,” Birchmeier said. “According to USDA figures, farmers purchased MPP coverage on 131 billion pounds of milk, representing approximately 60 percent of the U.S. milk supply.”
Thus far, Birchmeier said, the improvements to MPP and continued producer-pay prices well below the cost of production has generated a payback to producers who enrolled and paid the premium for coverage in the program.
“So far Michigan producers have received approximately $9.9 million,” he said. “With 833 participating dairy operations in the state, that puts the average MPP payments per operation at approximately $11,885 each.”
According to the American Farm Bureau Federation, that’s slightly above the national average payment rate through May of $7,400 per dairy operation, or 29 cents per hundredweight.
The total number of dairy farms enrolled in MPP for 2018 was up nearly 1,000 farms, or 5 percent, from 2017 enrollment levels.
While farm enrollment was up over prior-year levels, the amount of covered milk was down 14 billion pounds. The decline in covered milk is likely due to farmers opting to purchase protection as close to 5 million pounds as possible – the average volume of covered milk per farm is slightly higher than 6 million pounds.
More important than enrollment levels, however, is how farmers are using the program to protect against the risk of margin declines.
In 2016 and 2017, fewer than 25 percent of participating dairy operations elected buy-up coverage above the catastrophic $4 per hundredweight coverage level.
This year, 95 percent of the enrolled dairy operations elected buy-up coverage, and many of those farms elected the highest coverage level -- $8 per hundredweight.
USDA’s flexibility in allowing farmers to finalize coverage options until June 22 contributed to the upturn in buy-up coverage participation.
How has MPP performed?
Following the enhancements to MPP, USDA made the coverage retroactive to January 2018 for farmers electing to participate. MPP triggered payments at the $7 through $8 coverage levels from February through May. As of early July, USDA has made more than $155 million in program payments to dairy operations participating in MPP during 2018.
To receive these and future benefits, dairy farmers across the U.S. paid more than $65 million in premiums and administrative fees – resulting in a current net benefit of more than $91.5 million. This total will get larger as MPP is certain to be triggered in the coming months due to trade-related price declines.
Currently, USDA’s online MPP decision tool projects margins to remain below $8 per hundredweight through September, meaning dairy farmers should expect to continue receiving MPP payments for the next few months.
While the MPP payments will not make a dairy farmer whole, it does help to offset recent milk price and margin declines experienced in the market.
For example, July Class III milk futures, a function of wholesale cheese prices, have fallen by 14 percent, or $2.30 per hundredweight, since the beginning of June. Because of these price declines, the projected MPP margin for July declined by more than $1.40 per hundredweight.
The price decline comes despite strong dairy product exports, tighter American cheese stocks and slower than anticipated growth in U.S. milk production; but coincides with increased trade uncertainty related to Chinese and Mexican tariffs on U.S. dairy products.
More help on the way?
In addition to the farm bill changes in the dairy title, the Farm Bureau-developed Dairy Revenue Protection insurance product is expected to be available in the coming months, providing dairy farmers another tool in the risk management toolbox. Combined, the enhanced MPP, Dairy Revenue Protection and other risk management tools will provide a much more robust set of risk management tools for dairy farmers going forward.