The 2014 Farm Bill brings fundamental changes in national dairy policy, giving dairymen the ability to protect their profit margins, but an economist warns that they’ll need to stay abreast of the details still to be determined by USDA and do their homework ahead of what could be a short sign-up period for the new margin insurance.
It’s a different policy from the old “safety net” of price supports and offers a new level of flexibility for dairy producers, said Scott Brown, agricultural economist at the University of Missouri and the dairy policy adviser to the farm bill.
The insurance is a great opportunity for risk management that producers never had in the past, Brown said in a webinar hosted by Hoard’s Dairyman on Monday.
But the policy is open to interpretation as the USDA implements it, he said. Producers should stay abreast of the details as they come out and calculate the level of coverage that would work best for them.
“You really want to pay attention to the final language and how it’s going to operate,” he said.
The farm bill requires the margin protection program to be established no later than Sept. 1, which suggests a July-August timeframe for sign-up.
There’s a lot to be considered in deciding whether to participate and at what level, he said.
In considering participation, producers should first erase their knowledge of previously proposed alternatives, he said. They should also change their mentality from previous dairy support programs. The new program is an insurance program, a risk-management tool, versus the old program maximization, he said.
Currently, feed costs are down, milk prices are up and the industry might not see low margins for a while, he said, but the program provides a solid floor for risk management.
Margins will be calculated using the national all-milk price and national average feed costs. Producers should not dismiss participation because their margins are different from the national average. They should calculate their own margins and compare them with national margins, he said.
“The higher correlation between the two, the better the safety net,” he said.
Every operation has a certain amount of risk. Those that can’t withstand more risk might want to cover a higher level of margin, he said.
But producers need to consider the added cost for additional coverage beyond the federally subsidized minimum margin coverage of $4 per hundredweight of milk.
Paying more in premiums than the coverage provides doesn’t make sense, he said. For example, the premium increases 54 cents per hundredweight of milk for 50 cents of additional coverage from a $6.50 margin to a $7 margin for milk marketings of more than 4 million pounds a year.
Participation is for the life of the farm bill. Participants can, however, change both the margin level and the amount of production they want to protect each year.
While participation is voluntary, bankers might require participation as a condition for a loan. After the tough times in 2009 and 2012, they might see it as a way to avoid those heavy losses, Brown said.
But that’s not a bad tradeoff for the industry getting outside money to grow, he said.