Major New Risk Management Tool for Dairy Being Proposed

Geoff Vanden Heuvel

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Geoffrey Vanden HeuvelFor the rest of America’s big agriculture commodity growers, Federal Crop Insurance is their number 1 tool for managing price risk. The dairy safety net programs run by the federal government over the past decades have not utilized the crop insurance model, but instead have been either indirect income support like the Price Support Program that purchased butter, nonfat dry milk and cheese at prices which would enable plants to pay at least the support price for the milk made into those products. Or direct payment programs like the Milk Income Loss Program (MILC) and now the Margin Protection Program (MPP), which make direct cash payments to producers when certain circumstances occur.

The current program, MPP, seeks to accomplish two goals for dairy farmers. It provides a safety net to cover margin losses under a catastrophic occurrence like what occurred in 2009. This part of the coverage is fully financed by the federal government. MPP also has a “buy up” feature that allows producers to get margin protection at higher margin levels, but dairymen must pay part of the cost for that additional coverage. Producers have by and large abandoned the buy up component of the MPP because of a perceived lack of cost/benefit. There are various efforts by the industry and Congress to make changes to the MPP in the next farm bill. Unfortunately, many of the proposed changes seem designed to make the “buy up” part of the program much more favorable to very small producers with little or no consideration for the needs for risk management tools for medium and large producers. The government picking winners and losers in the subsidy game is not a good idea, but given the very limited amount of money in the federal budget allocated to the dairy safety net programs, this is about all that can be done. The budget for the dairy safety net in farm bill is about $50 million per year. That is a fraction of the $35 billion per year of annual milk sales that you are trying to provide safety for.

 

So, what is the new big deal? The Federal Crop Insurance Corporation approves of agriculture commodity insurance products. Under their commodity program they have policies for everything from almonds and apples to cranberries and figs. Corn, wheat, soybeans and cotton are the big ones, but milk does not have an insurance product. There is a Livestock Gross Margin (LGM) program that includes dairy but the funding for premium subsidies for the LGM program is shared with other livestock programs and limited to $20 million per year. While the livestock programs are limited in the federal budget, by law there is no budget limit for agriculture commodity insurance programs. So, the Federal Crop Insurance Corporation spends billions of dollars in premium subsidies on insurance policies for these other commodities. Congress seems ok with this approach because it is not a direct payment program, it uses market pricing mechanisms to establish insurance premiums and producers have to share in the cost of the insurance.

There are two things going on right now and the American Farm Bureau is in the middle of both. One is that the Farm Bureau has developed a Dairy – Revenue Protection insurance policy under the Federal Crop Insurance program guidelines that they are seeking to get approved as an agriculture commodity insurance program. This product will allow dairy farmers to buy price protection insurance policies. The second related effort is to get Secretary of Agriculture Sonny Perdue to classify milk as an agriculture commodity instead of a livestock program. Congress helped on this last point by including language in an appropriations bill this past spring clarifying that livestock insurance programs are for insuring animals and not the products of those animals like milk and eggs.

 

Dr. John Newton from the American Farm Bureau has been writing and giving presentations on the specifics of how the Dairy – Revenue Protection program would work. Essentially producers would be able to purchase a policy that would guarantee a certain amount of revenue for their milk, or the components in their milk, as they would choose. The program sells coverage based on the average quarterly price of milk, or the components of milk, for the next quarter and the four following quarters. The policies can be purchased every day, and the premiums are not due until after the period is over. The government will cover somewhere between 44% and 60% of the premium depending on the deductible level the producer chooses. Much more information on the workings of this program is available on the Farm Bureau website here.

I have had the chance to talk to Dr. Newton on a number of occasions about this program and I like what I hear. Because you can tailor the insurance policy to fit your particular milk utilization by picking a blend of class III and IV, or if you have high butterfat and protein you can utilize the component feature, you minimize the basis risk that exists in the current “buy up” part of the MPP. You can choose to cover any time period up to 15 months out and you can choose your coverage levels and deductibles. This is not a replacement for the catastrophic portion of the MPP because the insurance is based on market prices. When the market collapses, there is no decent market price available to insure. It is at that time that only the government can provide a safety net to help producers through the wreck. But this does seem like a much more flexible and therefore more valuable substitute for the Page 4 of 5 “buy up” portion of the MPP. Milk Producers Council has sent letters of support to Agriculture Secretary Perdue and the Federal Crop Insurance Board which you can read here.