By Cheryl Anderson
DTN Staff Reporter
DAVENPORT, Neb. (DTN) -- Dairy producers will have a new method of protecting their profit margins when an insurance program created by the 2014 farm bill begins on Sept. 1.
The new dairy margin protection insurance, the Dairy Producer Margin Protection Program, will replace the Milk Income Loss Contract program. It was announced with the passage of the new farm bill, according to Joe Horner, University of Missouri Extension economist.
The difference between the two programs is the new margin protection program will be more based on insurance than on direct payments from the government, Horner told DTN. "The producer will make a decision on how much of their profit margin they want to insure, and the payments will be based on actual feed and milk prices."
Producers will make a decision once a year, selecting coverage between $4 and $8 per hundredweight, based on what they think their feed costs will be in the coming year and how much they are willing to pay for insurance. Premiums range from no cost for the $4 per cwt. level to $0.475 for the $8 per cwt. level.
"Producers can choose the $4 per cwt. premium, which is free but has a low probability of paying off. Or they can pay the fee for the $8 per cwt. premium, which has a 50% chance of paying off," Horner said. "Based on feedback, most producers will probably make a decision somewhere between $6 and $7.50 per hundredweight."
Although enrollment is purely voluntary, Horner said he sees no reason for dairy producers to not participate in at least the free program, particularly for those producing about 4 million pounds of milk or less (roughly what a 200-head dairy would produce), since the insurance is heavily subsidized. Even larger producers will still find some degree of subsidy and a way to manage milk price risk.
The maximum amount of milk that can be insured is 24 million pounds per crop year. The program does not insure against dairy cattle death loss, unexpected decreases in milk production or unexpected increases in feed use.
"Unless you are philosophically opposed to government programs, there is no reason to not participate at least at the free level, which gives some degree of protection" Horner said. "It's the cheapest way to package a risk-management solution."
The Dairy Producer Margin Protection program will use the Chicago Mercantile Exchange Group futures prices for corn, soybean meal and class III milk. The indemnity at the end of the 11-month insurance period will be the difference, if positive, between the expected gross margin and the actual gross margin. USDA will recalculate the margin every month based on prices of corn, soybean meal and alfalfa hay. Producers will receive a check if the margin drops below the insured level for two months.
The program is open to anyone who owns dairy cattle in contiguous U.S. Sign-ups will be at local USDA Farm Service Agency offices beginning in late summer. There will be a $100 annual administrative fee to participate in the program, even for those choosing the free insurance.
FSA is not ready yet to take enrollment; however, the MILC program will continue until the Dairy Producer Margin Protection program arrives, which will be Sept. 1 at the latest.
Horner said it takes a bit of homework to calculate how much margin to insure. Enrolling is not difficult, Horner said, adding there is just a learning period to become familiar with it, as with any new program.
"Most producers will find it a little intimidating because it is new," he said. But once they go through it, they will find it relatively straightforward, just like any other insurance product.
Producers need to track their own feed-cost margins to see how they match up with national feed cost production, he said.
To help with that task, MU Extension has developed a guide for producers to track their cost of feed production titled "How to Compute Your Cost of Producing Milk." Anyone can download the guide at no cost.
The tool can be downloaded at: http://extension.missouri.edu/….
Cheryl Anderson can be reached at firstname.lastname@example.org.
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