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New Dairy Safety Net Woven with Key Principles

May 30, 2014

In the aftermath of the economic bloodbath created by the Great Recession of 2008-2009, a period during which dairy farmers collectively lost $20 billion in equity, it became painfully obvious that a complete reform of farm policy was needed.  The National Milk Producers Federation spent the next two years developing an innovative means of protecting farmers against low milk prices and, just as importantly, high feed costs – because rapidly rising feed costs had become the more urgent issue in the past decade.
After years of struggle on Capitol Hill to get a new dairy program enacted by Congress, what has emerged from this challenging process is an unprecedented opportunity for dairy producers to work with the federal government to gain protection from the unpredictable, catastrophic price shocks that unfortunately have become common in recent years.  While important questions about the new Margin Protection Program (MPP) still need to be answered by the Agriculture Department, it’s already clear that this new safety net will provide much improved economic security for the domestic dairy sector in the 21st century.  Here are some reasons why:
Flexibility: Farmers can choose their own level of margin protection each year.  The USDA is expected to create an open enrollment window in the preceding year, during which farmers can decide their coverage options for the following year. Each year, a producer’s historic base can be insured from 25% to 90%, from the premium-free $4/cwt. coverage level, up to $8/cwt.  NMPF has suggested to USDA ways that the program can be made farmer-friendly, while at the same time helping keep costs of the MPP at reasonable levels.
Affordability: NMPF worked with Congress to ensure that the MPP’s premium levels are affordable to farms of all sizes, including those that may not have previous experience with private-sector risk management tools.  Beyond the nominal annual sign-up fee of $100, basic coverage at $4/cwt. is free, at all levels of milk production.  Prices for coverage rise in proportion to the degree of risk covered. But, particularly for the first four million pounds of coverage, a valuable safety net can be obtained for mere pennies per hundredweight each year. And risk coverage on production over four million pounds is very reasonable at lower and mid-levels of margin protection.
Equitability: The MILC program formally ends on Sept. 1st.  The practical value of this program eroded over the past decade, as its annual coverage cap is now exceeded by the average-size dairy, which produces closer to four million pounds annually.  With the majority of our milk supply coming from farms not adequately covered by the MILC program, the new MPP provides better protection because it has no insurance coverage limitations.  This is a far more equitable way to protect our milk production – and dairy farm – infrastructure than the previous size-denominated efforts. We need modern risk management going forward, not a program designed for the past.
Adaptability: One of the arguments against the previous safety net employed by USDA is that the dairy product price support program – even at a ridiculously inadequate price level around $10/cwt. – made it harder for domestic markets to clear during periods of oversupply, and at the same time, harder for the U.S. to compete internationally.  It was easier to sell surplus cheese, butter and skim milk powder to the government than to commercial markets.  That problem was solved by terminating the price support program.  The USDA is no longer a customer for surplus dairy commodity production, at any price. This means processors will adjust their product mix to what domestic and international customers want, not what USDA CCC purchasing standards dictate.  The MPP will help the industry further adapt to the ebb and flow of global markets.
These four principles were the ones NMPF pursued in its efforts to create a new dairy program.  Enshrining these principles in the new MPP is a tribute to the work of dairy farmers who, despite significant opposition, persevered in pushing for something new and better. Yes, this program is not the whole loaf that we sought. But it will be far, far better than what it replaces.
USDA still has important decisions to make, from the timing of first-year enrollment, to the schedule of premiums to be paid by enrollees, to how farms with different ownership structures will be treated. It also has to flesh out how the complementary dairy product donation program will operate if and when margins become extremely low. Those issues will be resolved in the coming months.
But the bottom line is this is a once-in-a-generation revolution in risk management in America’s dairy sector, allowing our 50,000 farmers the opportunity to preserve equity in a way that their fathers and grandfathers never could.  Those who enroll will have skin in the game in the form of their premium payments, so this is not a government handout.  Most of all, the new MPP is an illustration that cooperation and hard work have their rewards.