The rapid decline in U.S. milk prices experienced during 2015 combined with the lack of widespread program payments from the new Dairy Margin Protection Program (MPP) has perpetuated a sense of “buyer’s remorse” with respect to MPP. Many farmers may be openly curious if the old Milk Income Loss Contract (MILC) payment program would have offered better safety net protection against recent milk price declines.
When the initial sign-up period for MPP coverage in 2015 got underway in September of 2014, farmers were in the midst of record-high milk prices. The U.S. all-milk price averaged $24 per hundredweight for the year, and in some parts of the country fluid milk prices approached $30 per hundredweight. Despite economic evidence of price cycles in dairy markets, many U.S. producers responded to the market price signals of 2014 by adding cows and increasing milk production.
Now, more than halfway through 2015, the U.S. is fast approaching another record year of milk production. Meanwhile, reduced demand in the wake of global supply increases have combined to put downward pressure on global dairy market prices. U.S. milk prices have fallen from their 2014 record highs but remain above milk prices received by farmers in Europe and New Zealand. Importantly, current U.S. milk prices would not havetriggered any payments under the old MILC program.
The MILC program, repealed in the 2014 Farm Bill, provided income support to dairy farmers based on the shortfall in milk prices below a feed-adjusted $16.94 per hundredweight trigger price. USDA milk and feed price data reveals that program payments under MILC would not have been triggered at any point during the first half of 2015. Through July of 2015 the Boston Class I milk price has averaged $19.59 per hundredweight while the feed-adjusted MILC trigger price would have averaged $17.98 per hundredweight. As a result, on average, milk prices would have needed to be $1.61 per hundredweight lower to have consistently triggered MILC in 2015. On a monthly basis, the closest MILC came to triggering a payment was in April of 2015 when the Boston Class I price was 64¢ per hundredweight above the feed-adjusted MILC trigger price. Put simply, MILC would not have triggered during the first half of 2015.
Going forward, August through October Boston Class I milk prices are known at $19.53, $19.59, and $19.09 per hundredweight, respectively. Late-September futures prices for milk and feed indicate that the likelihood of MILC triggering, had it not been terminated, remain at very low levels through the remainder of 2015.
In contrast, MPP, which replaced MILC in September 2014, immediately began making payments in 2015. While MPP remains a work in progress, MPP is functioning as intended and has been in payment status for all months during the first half of 2015. MPP is not a direct payment program, it is not designed to enhance income, and importantly it is not an investment product. Instead, MPP is an insurance-style safety net program designed to help dairy farms protect against catastrophic losses in farm income resulting from milk and feed price variability. Farmers pay premiums for coverage and in exchange receive risk management protection at levels they choose up to $8 per hundredweight. Protection above $8 per hundredweight is not provided by MPP. However, farmers can simultaneously use private risk management options such as futures or forward pricing programs to compliment MPP and potentially cover margins higher than $8 per hundredweight.
For the 2015 coverage year USDA Farm Service Agency data revealed that 55 percent of licensed dairy operations, representing approximately 80 percent of projected 2015 U.S. milk production, signed-up to participate in MPP. While few farmers elected the highest level of supplemental coverage, those that did are scheduled to receive more than $400,000 for the first half of 2015. Those who insured less, including those who paid $100 for basic $4 coverage, have not received any compensation because national average margins haven’t been at the catastrophically low levels experienced during 2009 or 2012. Instead, three consecutive big crop years in corn and soybeans have pushed feed prices to their lowest levels in four years and effectively offset recent milk price declines. The net effect of parallel declines in both national average milk and livestock feed prices has been that MPP margins remain near the five-year average level of $8 per hundredweight.
USDA’s MPP decision tool indicates that margins are improving, yet considerable risks remain for 2016. There are a number of factors to reflect on that could combine to pressure dairy markets going forward. First, feed prices are at multi-year lows and grain farmers may soon consider adjusting acreage in search of crops with higher per acre returns. If feed supplies tighten through fewer acres planted, or adverse weather reduces the crop size, feed prices would increase and margins would surely decline.
Second, for a number of years growth in domestic milk production has outpaced domestic consumption growth. With supplies increasing faster than domestic consumption, increased export opportunities helped to remove surplus product and support U.S. milk prices. However, current U.S. prices of cheese and butter remain above international price levels and a strong U.S. dollar makes our products less competitive overseas. The Russian embargo and slowing Chinese demand for dairy also hang over the market. The U.S. Dairy Export Council expects exports to struggle through mid-2016. With dwindling export opportunities milk prices could face pressure in 2016 as the U.S. amasses record inventories of cheese and powder. Bottom line, milk and feed price volatility is likely to persist. While risk in 2015 has been on the revenue side, going forward, risks will remain two-fold and justifies replacement of MILC with MPP.
USDA’s MPP decision tool includes a financial stress-test calculator. Using the stress-test feature dairy farmers may examine the extent to which MPP can assist in managing farm risk as it pertains to profit, liquidity, and solvency, given the uncertain milk and feed environment during the upcoming year. With so much uncertainty in 2016 now is not the year to walk away from MPP.
(Washington, D.C. – February 16, 2016) – In order to strengthen the ongoing partnership between the dairy and beef segments of the cattle industry on animal care issues, the National Milk Producers Federation and the beef checkoff-funded Beef Quality Assurance program today announced they will jointly be offering more training opportunities for farmers and ranchers in 2016.
The National Milk Producers Federation continues to accept applications for its National Dairy Leadership Scholarship Program for academic year 2016-2017. Applications must be received no later than Friday, April 8, 2016. 
Paul Bleiberg joined the National Milk Producers Federation staff last month as Senior Director of Government Relations, bringing with him 10 years of government and agriculture policy experience with a strong focus on dairy policy.
Trained NMPF staff are offering the dairy processing industry the necessary courses to become compliant with the FSMA Preventive Controls for Human Food rule. NMPF is planning a course for the dairy industry in Arlington in April.
The course agenda and materials for these courses were developed by FSPCA under a grant from FDA. Each course will last 2½ days, providing attendees with the knowledge to allow them to develop the necessary food safety plans to meet the new and enhanced FDA requirements that go into effect over the next three years.
As part of NMPF’s ongoing focus on developing new markets for dairy farmers in the environmental area, NMPF staff have been working with officials in Maryland who are developing a new Nutrient Trading Program.
NMPF is opposing a state bill that came before the Maryland House of Delegates in early February that would legalize the sale of raw milk in the state. 
