GOODING, Idaho — The recent rally in milk markets is welcome news to U.S. dairy farmers, who have wrestled with dismal prices for more than four years.
But that doesn’t guarantee them a profit or that they will break even. Their cost of production weighs heavily on the bottom line, and feed prices continue to increase.
That’s a concern for Steve Ballard, who with his wife, Stacie, and son Travis owns Ballard Family Dairy & Cheese, where they milk about 100 Jerseys.
Penciling out costs for the year ahead, he figures rising feed prices will increase his production costs $1.50 to $2 per hundredweight of milk.
Together with other rising costs — from teat dip to worker’s compensation insurance — his margin continues to erode.
“And I don’t have any way of increasing my milk price,” he said.
Market down cycles used to be fairly short, he said, but now they’re longer and harder to weather.
“So much is out of a dairyman’s control. It’s a hard industry to survive in,” he said.
But help might be on the way in the form of the new Dairy Margin Coverage Program, which goes into effect this year. It replaces the Margin Protection Program established in the 2014 Farm Bill.
MPP was meant to insure that dairy operators maintained a positive margin between the milk prices they received and their feed costs.
The program’s “margin” was the difference between a national all-milk price and a national feed-cost calculation based on the prices of corn, alfalfa hay and soybean meal.
It was designed to guarantee a margin of at least $4 between the milk price and cost of feed at no cost to farmers. But relying on a $4 margin would be catastrophic, farmers said, because it doesn’t cover all the other expenses of producing milk.
MPP was also intended to provide greater protection through additional insurance farmers could purchase to guarantee a larger margin.
If a producer insured a margin larger than what USDA calculated as the national margin, he would receive a payment for the difference based on the amount of milk he had insured.
But changes to the original MPP proposal during congressional farm bill deliberations rendered the program ineffective. It didn’t protect farmers’ margins the way it was supposed to, leaving many with no safety net as milk prices fell and feed prices rose.
The result has been devastating. Since Congress passed the MPP five years ago, more than 7,300 dairy farms — 16% of the national total — have gone out of business.
Because it used national averages to calculate milk prices and feed costs, farmers realized the program would be less than perfect. But Ballard said he was initially hopeful MPP would help cover at least some of his production costs in lean times.
When Congress changed the feed-cost formula, he could see it wasn’t going to pan out. He signed up 90% of his milk production but only at the no-cost $4 margin, which provided little protection.
A significant number of dairymen, however, did purchase coverage to protect larger margins. But when MPP failed to pay out at those margins, they also soured on the program, and most quit buying coverage.
Congress made adjustments to MPP last year and incorporated some of those improvements and others into the new DMC program, which became a major part of the 2018 Farm Bill.
Swing and a miss
The original MPP program was conceived almost a decade ago in response to the 2009 crisis in dairy country.
The National Milk Producers Federation wanted to develop forward-thinking dairy policy that would be more effective than what was in place, Paul Bleiberg, the organization’s vice president of government affairs, said.
“We wanted to create a program to better reflect the challenges of a modern dairy industry,” he said.
No one milking cows in 2009 is likely to forget the devastation the global recession brought to their farms. Nearly 4,000 U.S. dairy operations shuttered their barns by 2010.
While milk prices recovered in 2011, feed costs skyrocketed and dairymen burned through more equity to stay in business; 9,300 more farms closed by 2014.
All told, the hard times and lack of a viable safety net caused 22% of U.S. dairy operations to shut down between 2008 and 2014.
MPP was signed into law in 2014, but it “did not perform up to the expectation we had for it,” Bleiberg said.
The major flaw was the feed cost formula. NMPF had proposed a formula that accurately reflected feed costs, but fiscal constraints resulted in Congress discounting the formula 10% and distorting the calculated margin, he said.
The feed formula lowered feed costs in the calculation about $1 per hundredweight of milk compared to NMPF’s original proposal. For example, what would have been a $7 margin was now an $8 margin.
That formula resulted in program margins that were higher and failed to trigger indemnity payments as intended in the original proposal.
Fixing the MPP
In 2016, NMPF started an internal process to take stock of the MPP program in an effort to fix the problems.
The fix NMPF developed would be to restore the original feed cost calculation or increase available coverage levels to make up for the $1 loss in the margin formula.
In addition, coverage levels for the first 5 million pounds of milk were raised, and premium rates were reduced to make more coverage more affordable, he said.
The NMPF then went to Congress, which developed the new DMC as part of the 2018 Farm Bill. It was designed to be more affordable, more effective and cover larger volumes of milk.
The highest coverage level in the old MPP was an $8 margin at a cost of 47.5 cents per hundredweight for the first 4 million pounds.
In the DMC, the highest coverage level for the first 5 million pounds is a $9.50 margin at a cost of 15 cents per hundredweight.
That coverage is available to all producers, and payouts for the first four months of 2019 have already been determined. Producers who enroll at the $9.50 level will get back more money in January and February alone than their premium cost for the full year, he said.
Adrian Boer, a Jerome, Idaho, dairy producer, was on NMPF’s board of directors when MPP was developed and helped steer the program. But once it was modified by Congress, he only participated at the no-cost catastrophic level.
“It’s a tool that really hasn’t fit us,” he said.
Along with two of his sons and one grandson, he operates three dairies and milks about 5,500 cows.
“The cost of the program was so high, it wasn’t feasible for us,” he said.
The program fit smaller producers better. But even at that, Congress in its “infinite wisdom” lowered the feed-cost side of the equation and made the program less effective, he said.
The average cost of production in Idaho is about $16.50 per hundredweight of milk. That includes other expenses, such as labor, in addition to feed costs. Boer needed about a $9 margin between milk prices and feed costs, but MPP premiums were “way too big” to insure that level, he said.
The 2018 Farm Bill and the DMC included in it is good for producers with 200 or fewer cows, especially because they can sign up retroactively for 2019, he said.
But larger producers are still looking at high premiums to insure the balance of their milk production at meaningful margin levels, he said.
“Buy-up is too high,” he said.
Using the DMC decision tool, however, he found that a large producer can cover the first 5 million pounds of milk at the $9.50 margin level for a cost of $7,600 without having to buy higher coverage for the balance of his milk. If the projections are correct, that insurance would result in an indemnity payment of about $24,000 for 2019.
“At what these numbers show, you’d be silly not to sign up for the program,” he said.
That net of about $16,000 isn’t a lot of money in the grand scheme of things, he said, but anything helps.
Hernan Tejada, a University of Idaho Extension dairy and livestock specialist, would agree.
While the projected indemnity payout is small compared to feed costs — which could be roughly $400,000 for the same volume of milk — producers should take advantage of the program for the first 5 million pounds, he said.
The lower premiums also make insuring a $9.50 margin attractive, as it increases the possibility of receiving payments, as is already the case in 2019, he said.
The average-size dairy in Idaho produces 30 million pounds of milk a year, with much higher costs than smaller dairies. But any money should be welcome, he said.
For production above 5 million pounds, producers should at least insure at the $4 catastrophic level or perhaps the $5 margin level, given the lower premium, he said. They should also compare the cost of insuring that production at a higher level with the new Dairy Revenue Protection program, he said.
“All size dairies should be considering the new DMC program,” said Ryan Yonkman, vice president of the dairy brokerage firm Rice Dairy.
With proper explanation, it’s hard to see why any eligible dairies would not take advantage of a program that is retroactive to Jan. 1 and already showing a payout, he said.
USDA opened enrollment for DMC on June 17. The online decision tool calculates the costs and potential payouts at different coverage levels. It also figures in MPP premium reimbursements that can be applied to DMC premiums and a 25% discount if producers lock in coverage for the next five years.
Ballard, the Gooding dairyman, planned to enroll 95% of his production history at a $9.50 margin and said he’s hopeful the program will help cover his cost of production.
“It makes sense to do it. We hope it makes sense and works this time,” he said.
There’s always the chance Congress could dial it back, he said, but hopefully the program does what it’s designed to do — keep dairymen in business to ensure the U.S. food supply.
The program is not a handout or meant to make dairymen a profit. It’s an insurance program, and dairymen have skin in the game through buy-up coverage, he said.
“It’s just there for support. If we lived in a perfect world, we wouldn’t have these price swings that are so dramatic,” he said.
If milk were priced right, the industry wouldn’t need a government program to help cover the cost of production — and that’s something the industry needs to address, he said.
“When you sell under cost of production for long periods of time, something is wrong with the pricing system,” he said.
His family operation is somewhat insulated from milk markets. Half of its production goes to make high-value artisan cheese. But he still has to deal with a cost of production that runs about $20 per hundredweight of milk.
That scenario has to be made sustainable if the dairy is going to be around for his grandchildren, he said.