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Dairy margin insurance offers flexibility

The new dairy margin protection program in the farm bill provides a better safety net and more flexibility to producers, offering them another risk-management tool. With an expected short sign-up period, producers are being encouraged to start running the scenarios of coverage and what might work best for their operations.
Carol Ryan Dumas

Capital Press

Published on April 17, 2014 5:18PM

Jerome, Idaho, dairyman Adrian Boer, left, discusses the new dairy margin insurance program with ag economist Scott Brown, University of Missouri, at an Idaho Dairymen’s Association meeting in Twin Falls April 16.

Carol Ryan Dumas/Capital Press

Jerome, Idaho, dairyman Adrian Boer, left, discusses the new dairy margin insurance program with ag economist Scott Brown, University of Missouri, at an Idaho Dairymen’s Association meeting in Twin Falls April 16.

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TWIN FALLS, Idaho — Dairy policy in the new farm bill offers producers a new level of flexibility and improved fundamental changes in their safety net.

But the new margin insurance program is just one risk-management tool, and producers should consider all their options.

It is not a one-or-the-other deal, and dairymen should use the suite of risk-management tools that works best for their operation, Scott Brown, ag economist with the University of Missouri and dairy policy adviser on the farm bill, said during a meeting of Idaho Dairymen’s Association in Twin Falls April 16.

That said, the voluntary margin protection plan offers the flexibility to insure a wide range of production at different coverage levels and has no payout cap. There’ll be more choices, which will require additional homework, he said.

USDA is working on interpreting congressional intent and formulating rules for the new program, which will likely take another three to four months. With an implementation date of Sept. 1, that won’t leave a lot of time for producers to analyze the new program under the rules, so they should be working on their selection of coverage now, he said.

The program will protect margins of milk price over feed costs and will be based on the national all-milk prices and a calculation of national feed costs. There is an annual fee of $100 per operation for those who sign up for the program, and there are no premiums for the federally subsidized $4 per hundredweight of milk margin.

Producers can insure 25 to 90 percent of their production in 5 percent increments, and a per hundredweight margin between $4 and $8 in 50 cent increments. Premiums will be lower for production under 4 million pounds of milk annually, including the first 4 million pounds for dairymen who produce more than 4 million pounds.

Premiums for coverage above the $4 margin will range between 1 cent per hundredweight and $1.36 per hundredweight and will remain the same for the life of the farm bill.

Participating producers will be able to choose the amount of production they want to insure and the level of coverage on an annual basis.

Coverage is limited to a producer’s production history, the highest level of production in 2011,2012 or 2013, and will be adjusted annually based on the national average growth estimated by USDA. Any individual growth beyond the national average will not be protected.

Participating producers will receive an indemnity payment if the national margin falls below their coverage level for two consecutive months in the periods of January-February, March-April, May June, July-August, September-October, and November-December.

For instance, margins could fall below insured levels in January and be offset by better margins in February, wherein no indemnity payment would be issued, Brown said.

Indemnity payments will be based on annual production divided by six and have nothing to do with seasonal production, he said.

While program margins will be based on national milk prices and costs, milk payments and feed costs will differ across the country. But that should not deter producers from considering participation. What matters is how closely a producer’s margins correlate with national margins, he said.

The higher the correlation between the two, the better the safety net. If individual margins move with national margins, the program might be an excellent risk-management tool for those individuals, he said.

Calculating individual margins and how they correlated with national margins over the past five years is the most important thing producers can do right now. The next step is determining how much risk a producer can afford relative to coverage premiums.

If a producer is pessimistic or heavily leveraged, he might want to buy more coverage, he said.

Brown said he hasn’t seen an operation where some coverage wouldn’t be beneficial, and it could help avoid the catastrophic losses experienced in 2009.

Lenders response to the program is also going to be an important factor, he said.

Producers also need to consider how everyone else is going to participate, which will be a blind spot out of the starting gate. Large participation means margins will remain lower for a longer period of time. Smaller participation means many producers will see the full market effect of low margins, he said.

Producers should also pay attention to current market conditions when making their annual coverage choices. If the year looks like it’s going to start with $4 margins, it’s not hard to see that buying coverage for an $8 margin would be a smart choice, he said.

Other components of the program have not yet been hammered out and will make a difference when USDA issues the rules, but dairymen should take what they know now and start working through coverage scenarios, he said.

Ag economists are developing spreadsheets and other tools to help dairymen make decisions related to margin insurance, and dairymen should use all those tools, he said.


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