Margin Protection Program USDA’s Safety Net For Producers: The Dairy Farmer Margin Protection Program USDA’s Safety Net For Producers: 2018 Enrollment Update This slide presentation explains some of the key features of the newly revised federal dairy safety net program, called the dairy Margin Protection Program (MPP). The National Milk Producers Federation and its members were instrumental in the enactment of this program as part of the 2014 Farm Bill … and we continue to work closely with USDA on ways to improve the program. In February 2018, Congress approved several important changes in this program, and also improved the access to other risk management programs administered by USDA.

Key Changes in 2018 Adjusting the first tier of covered production to include each farm’s first 5 million pounds of annual milk production (about 217 cows) instead of 4 million pounds Raising the catastrophic coverage level from $4.00 to $5.00 for the first tier of covered production for all dairy farmers Reducing the premium rates for the first 5 million pounds of production for more affordable coverage Changing the margin calculation from a bi-monthly to a monthly basis Waiving the annual $100 administrative fee for underserved farmers The budget bill approved by Congress in February 2018 authorized these key changes in the MPP, which make it more useful and cost-effective to farmers.

Margin Protection Program USDA will soon announce a re-opened sign-up period for 2018 NMPF has asked USDA to make new coverage elections retroactive to Jan. 1, 2018 Producers already in the program will be able to adjust their coverage levels With tight margins projected for the first half 2018, producers should closely examine participation and coverage levels with the new, substantially lower premiums Sign-up for 2018 coverage under the MPP was closed in December 2017, but USDA will soon announce when it will re-open the enrollment window to allow farmers to sign up – if they have not previously used the program, or if they dropped out. Those still in the program will have the opportunity to adjust their coverage levels. Given where forecasts are for margins in early 2018, producers should run the numbers to determine the value of the MPP this year. For instance, if the new, reduced premiums for the first tier of coverage were in place in 2016, participants buying up to the $8 coverage level would have netted 41 cents per hundredweight, versus the 4-cent net payout they actually received two years ago. Sign-up or coverage changes are made at local Farm Service Agency offices. To enroll, producers must be able to document their production history and that they are currently engaged in the production and commercial marketing of milk. Once producers sign up, they are in the program until the 2014 farm bill expires at the end of 2018.

Risk Management Tools Congress also removed the $20 million annual cap on livestock insurance, including the Livestock Gross Margin for dairy (LGM-Dairy) program This will allow USDA to develop and/or approve additional risk management tools that can complement MPP-Dairy Will likely be of particular interest to larger producers to provide additional risk management options Existing restrictions on using both LGM and the MPP at the same time remains in place The budget bill also made an important change that will be valuable to other dairy farmers not wishing to use the MPP. The $20 million annual cap on livestock insurance programs, including LGM-dairy, has been removed. This will expand the resources available for those wanting to use the LGM, and it will allow USDA to develop other additional insurance programs, such as the revenue protection program developed by the Farm Bureau.

What’s the Margin? A national average margin, not an individual farm’s margin The U.S. average all-milk price minus average feed costs, computed by a formula using national benchmark prices for corn, soybean meal and alfalfa hay Reflects costs of feeding all dairy animals on a farm, per hundredweight of milk produced For purposes of this program, the margin is a national average margin, not the actual margin on your own farm. USDA computes it using the national all-milk price and national average feed costs. Feed costs are computed through a formula using national benchmark prices for corn, soybean meal and alfalfa hay. The formula reflects the cost of feeding all the dairy animals on a farm, not just the cows being milked. The margin is the difference between the U.S. all-milk price and national average feed costs.

What’s the Margin? This line graph uses USDA’s formula to show average margins over the last decade. Since 2006, the average margin has been around $8.50 per hundredweight. But within that average are some wild swings. The margin dropped below $3.00 in 2009 and again in 2012. More recently, it topped $15.00 thanks to 2014’s record milk prices. The $8 maximum protection level is in black. In effect, the MPP protects producers from the worst effects of those dips in the average margin. Higher levels of MPP coverage generate more frequent and greater support, at a higher cost for the premiums.

What’s Your Production History? Initially equals your farm’s highest production in either 2011, 2012 or 2013 Yearly increases based on average growth in national production 2015 – USDA Bump of 0.86% 2016 – USDA Bump of 2.61% 2017 – USDA Bump of 1.34% 2018 – USDA Bump of 1.86% Expansion beyond national average is not insured New producers extrapolate based on actual production or average milk per cow For this program, production history is set initially as the highest production in either calendar year 2011, 2012 or 2013. Production histories increase yearly based on the average growth in national milk production, as determined by USDA. For example, since USDA determined that milk production increased 2.61 percent in 2014, those already in the program will see their production history increase by the same 2.61 percent for the 2016 enrollment year. For 2017, production will bump up another 1.3 percent. Any expanded production on an individual farm, beyond these national average increases, is not insurable. If national average production decreases, however, production history will not decrease with it. New producers who don’t have an actual, 12-month production history can use an estimate based on their actual production for the months in which they have produced milk, and extrapolate that to a 12-month total. Or they can use their herd size multiplied by the national average production per cow.

2018 Decisions Producers can protect between 25%-90% of production history in 5% increments Base coverage of 90% at $5 margin is standard for all enrolled operations for first 5 million pounds at no cost; production beyond 5 million pounds will have catastrophic coverage base of $4 margin Producers can choose level of supplemental margin protection, from $5.50/cwt. to $8/cwt., on their first 5 million pounds at Tier I premiums Supplemental coverage options on >5 million pounds begin at $4.50/cwt. at Tier II premiums Dairy farmers signing up for the MPP during the current enrollment period have two important decisions to make: how much of their production to protect, and the margin level they want protected. They can protect between 25 percent and 90 percent of their production history, in five-percent increments They can choose a level of margin protection, from $5.50 per hundredweight to $8 per hundredweight, in 50-cent increments, on the first tier of covered milk production history Coverage at the second tier, above 5 million pounds, is also in 50-cent increments, but starts at $4.50   Those who purchase supplemental coverage, but don’t ensure the maximum 90 percent coverage level on their supplemental protection, will still be covered at 90 percent at the $5 level. This provides the maximum allowable catastrophic coverage to all enrolled farms.

Above 5 Million Pounds (Tier II) Premium Rates for 2018 Margin Level Coverage First 5 Million Pounds (Tier I) Above 5 Million Pounds (Tier II) $4.00 No cost $4.50 $0.020 $5.00 $0.040 $5.50 $0.009 $0.100 $6.00 $0.016 $0.155 $6.50 $0.290 $7.00 $0.063 $0.830 $7.50 $0.087 $1.060 $8.00 $0.142 $1.360 Here’s what the premium rates look like, per hundredweight, at different margin coverage levels. At a margin coverage level of $4, there are no premiums on the first tier of milk production history, up to 5 million pounds. Premiums start at the $5.50-per-hundredweight level and increase as the margin protection level increases. The premiums for buy-up coverage above 5 million pounds have not changed. Dollar amounts are per hundredweight

Payments to Producers Program pays when average margin for each monthly period is below the margin selected by the producer Program pays on one-twelfth of production history, multiplied by percent coverage selected Producers will receive payments shortly after the margin cost calculations are made final Example: If a payment is triggered in January, the margin will be announced at the end of February and payment will be sent in March The MPP pays benefits when the average margin for specific, monthly periods is below the level selected by the producer. At that point it pays on one-twelfth of a farm’s production history multiplied by the percentage of production history coverage the producer has selected.

Final Thoughts MPP remains a work in progress, and NMPF will work with Congress and USDA to continue to improve the program Farmers should run the numbers to see how the lower premium levels will potentially benefit them in 2018 Other livestock economic insurance options for dairy farmers may soon be available through USDA The launch of the program in 2014 capped five years of work by NMPF, its member cooperatives and many dairy producer groups. The program is more flexible, more comprehensive and more equitable than any previous federal dairy safety net. It will help protect against a repeat of 2009-type catastrophic losses.