By:  Kenny Burdine                                              

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     The dairy market continues to deal with challenging milk prices, especially when compared to the lofty levels seen in fall 2014.  Figure 1 tracks US All Milk price through June 2015, which has increased only $0.40 per cwt from April.  USDA ERS projects milk production to continue to increase through the first half of 2016.  Mid-year cattle inventory estimates showed a 1% increase in dairy cow numbers year-over-year despite margins being considerably tighter now than they were last summer.  The adage about dairy production responding quickly to higher prices, but slowly to lower prices appears to remain.

Figure 1: US All Milk Price (2009-2015)

Figure 1: US All Milk Price (2009-2015)

Data Source: Understanding Dairy Markets Website: http://future.aae.wisc.edu/

 I wanted to devote a little more discussion to the Margin Protection Program for Dairy (MPP-Dairy) in this issue.  The establishment of the MPP-Dairy program marked the end of the Milk Income Loss Contract (MILC) program.  MPP-Dairy, in combination with the Dairy Product Donation Program (DPDP), is the new dairy safety net.  The first round of signups was completed last fall and it was estimated that 47% of Kentucky’s milk production was enrolled in the program (based on 2013 production levels).  This compares to a national estimate of just over 50%. 

     Through MPP-Dairy, producers are given the opportunity to protect an estimated margin, milk price minus feed costs, based on monthly prices for US All Milk, Corn, Soybean Meal, and Alfalfa Hay.  These are national prices, with the exception of Soybean Meal, which uses the rail price from Decatur, IL.  Based on an assumed feed ration using those three feed items, an estimated margin is calculated each month (US All Milk price minus estimated feed costs per cwt).  Monthly MPP-Dairy margins are aggregated into six couplets by averaging January-February, March-April, May-June, July-August, September-October, and November-December.  Unlike LGM-Dairy, producers cannot modify the assumed feed rations.

     Understanding the MPP-Dairy margin is likely best accomplished by looking at the margin over time.  Figure 2 shows the calculated MPP-Dairy margin since January 2009.  While the program did not exist until fall 2014, the chart is intended to provide some historical perspective on what this margin has looked like over time.  Note the small increase from April resulting from a slight increase in milk price and a slight decrease in feed prices.

Figure 2: MPP-Dairy Margin (January 2009 – June 2015)

Figure 2: MPP-Dairy Margin (January 2009 – June 2015)

Data Source: Understanding Dairy Markets Website: http://future.aae.wisc.edu/

 

     Through MPP-Dairy, producers have the opportunity to cover these couplet margins in a range of $4 to $8 per cwt, in $0.50 increments.  For example, if a producer chose the $7 coverage level, and the January-February couplet margin was $6.25, they would receive $0.75 per cwt for one-sixth of their covered production for that year.  If the couple margin for March-April was below $7, a payment would be made on another one-sixth of covered production.  Producers can choose to cover up to 90% of their production history, which is defined as their highest annual level of milk markets from 2011-2013.

     Enrollment in MPP-Dairy for the 2016 calendar year is currently underway and will continue through the end of September.  Producers who did not enroll last year can still enroll for 2016.  Further, producers who enrolled last year will need to choose their coverage levels and coverage percentages for 2016.  The cost for enrollment in the program is $100 per year, which essentially enrolls producers in the program at the $4 level.  Premiums to purchase additional coverage can be found in Table 1.  Note that premiums are considerably lower for dairies that cover less than 4 million lbs.  Larger dairies with production histories exceeding this can still get the lower premium rates on the first 4 million lbs they choose to enroll.

Table 1: Margin Premiums by Coverage Level and Pounds Covered

Coverage Level

Premium per CWT

(First 4 million lbs)

Premium per CWT

(After 4 million lbs)

$4.00

None

None

$4.50

$0.010

$0.020

$5.00

$0.025

$0.040

$5.50

$0.040

$0.100

$6.00

$0.055

$0.155

$6.50

$0.090

$0.290

$7.00

$0.217

$0.830

$7.50

$0.300

$1.060

$8.00

$0.475

$1.360

  It is interesting that as I write this article, the most recent MPP-Dairy couplet was almost exactly $8.  During initial signup last year, MPP-Dairy margins were in the $10-$15 range.  So, we come into this signup period with a much different perspective.  Figure 2 serves as a good illustration that things can change quickly in the dairy sector.  Enrollment in MPP-Dairy is one way dairy producers can protect themselves from major swings in the markets.

     Producers who chose not to enroll last year may want to give the MPP-Dairy program another look in the current market environment.  This will be especially true for those who chose to use LGM-Dairy, rather than MPP-Dairy last year as the available margins through LGM-Dairy will be lower given current market conditions.  At the same time, producers who did enroll in MPP-Dairy last year may determine that they would like to select a higher level of coverage than they chose for calendar year 2015.  If producers enrolled in MPP-Dairy last year, but do not select a coverage level for 2016, they will be automatically enrolled at the $4 level.

     Additional details on the MPP-Dairy program can be found in the publication AEC 2014-15, “The Margin Protection Program for Dairy in the 2014 Farm Bill” available at:  www.uky.edu/ag/agecon/pubs/ext2014-15.pdf.