What could, should be done with the MPP?

Back when the MPP was rolled out in 2014 as part of the then-new farm bill, the program was touted as a better replacement for the Milk Income Lost Contract program. Dairy farmers of any size could attain catastrophic coverage, for when the national dairy production margin (the difference between the all-milk price and average feed costs) fell below $4 per hundredweight for just a $100 annual administrative fee. Options were also available for margins up to $8 per hundredweight.

Producers could choose to cover different percentages of their yearly milk output. Different premiums were available based on three different milk volume tiers. The U.S. Department of Agriculture calculates the margin every month. Every two months, the margin gets averaged and if the margin falls below $8 per hundredweight, payments are made for the period.

Win-win situation gone

In 2014, with a record high average milk price of $15.62 per hundredweight in the past year, the MPP was presented as a tool with the dice loaded; as a win-win for dairy risk management, Bozic said. The reality hasn’t matched up. There were high hopes for MPP success in 2015 due to falling milk prices, but feed price declines at the same time meant, though there were some payouts for those covered at the highest levels, payments weren’t enough to offset the premiums paid in to the program.

So far this year, there have been payments for some tiers, particularly when the margin hit $5.76 for the May/June period. However, only farms in the small farm category (150 cows or less) covered at $6.50 per hundredweight or higher have made it ahead on their MPP investment, Bozic said.

Switch to higher coverage

After the discrepancy between what was paid in and what ended up being paid out in 2015, many producers switched from coverage at higher levels to $4 coverage.

Bozic discussed what could be seen as some of the problems with MPP as it stands now: too expensive; not helping farmers when they need it most; the wrong expectations were set when the program was introduced; it doesn’t protect against rises in non-feed costs and maybe it should; and/or it doesn’t help small or large dairies enough. However, he also wanted to hear from Minnesota dairy farmers what they thought hang-ups with the program were. Their thoughts:

• With coverage at the $7.50 level for the past two years, “I almost got what I put in both years. It didn’t help a bit.”

• Frustration that ag secretary Tom Vilsack touts the $11 million the program has paid out, but never mentions that about $70 million has been paid into the program.

• At $4 coverage, nearly every farmer would be out of business before they would receive a payment. “It kind of reminds me of a life insurance policy that pays out when you die.”

• The Livestock Gross Margin for Dairy program provides more security for a farm’s bottom line.

• Not protecting against rises in non-feed costs such as property taxes is a big problem.

• Curiosity about how MPP has paid out compared to how MILC would have.

“There’s a range of grievances,” Bozic said.

These hang-ups are the price paid for a simplistic program, Bozic said. As preparations begin for the next farm bill, a push to revise MPP will likely occur. While there are things that could be adjusted, “There are some elements we should fight to preserve,” Bozic said.

One of the things worth considering keeping is that premiums stay the same regardless of the forecast for the year ahead, Bozic said.

MPP is just part of the agricultural landscape, and will have many hot issues to contend with that include immigration, trade and whether or not the farm bill should continue to include food programs.

“The assumptions would be we’ll be in the defensive position (with MPP),” Bozic said. “We may be happy if we can keep it as it is now. We’re now in a new administration that may be looking to reduce overall agricultural spending.”

Options for MPP moving forward could include no changes, adjustments to the feed calculation, regionalization and reducing premiums for smaller farms.

If it stays the same, it will only be good for years like 2009, Bozic said, a phenomenon that would likely come only once per farm bill.

Feed calculation adjustment

Adjusting the feed calculation favorably would make a difference, but typically only in a bad year.

Regionalization would likely be best left for LGM, Bozic said. A strong relationship between milk basis and feed costs exists.

As for helping small farms, increasing subsidies for this group would likely not drastically change the market, so this could be a valid option, Bozic said.

MPP will stay as is for the year ahead. With a forecast for 2017 that “looks very reasonable” according to Bozic, it’s unlikely there will be payments for most, particularly for those covered at $6.50 and below.

At that rate, those with LGM might want to consider staying with it, Bozic said. Considering futures and puts is also a viable risk management option.

“Do risk management, but probably MPP isn’t it,” Bozic said. “I wouldn’t recommend it as a first option. I would look at other options. Appreciate what MPP may do for us if a year is really bad.”

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