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Updated MPP very likely to pay dairy producers

With little more than a week remaining until signup deadline, farmers should take a second look at MPP for 2018.

Farmers have until June 1 to finalize their coverage elections for 2018 for the updated Dairy Margin Protection Program (MPP), which was adjusted in the February budget act. And according to outlooks, dairy farmers would be smart to sign up to make sure they’re not missing out on needed cash assistance.

Reports suggest that as of mid-May, fewer than 8,000 dairy operations had signed up for the improved MPP. John Newton, director of market intelligence at the American Farm Bureau Federation, said similar patterns have been observed in past years where dairy operations would finalize their coverage options in the final week prior to enrollment. “However, for the improved MPP, there is no need to wait, as the benefits of participation are guaranteed to be positive for 92% of the dairy farmers previously enrolled in the program,” Newton said.

“With so much uncertainty around milk and feed prices in 2018, one certainty many dairy farmers have is that the improved MPP will provide some financial assistance. With little more than a week remaining until the signup deadline, farmers should take a second look at MPP for 2018 and make sure they are not leaving money on the table,” he added. 

The modifications made to MPP were designed to make it a more attractive risk management tool for small- and medium-sized dairy operations by reducing premium rates, delivering payments monthly, increasing the catastrophic coverage levels and making more milk eligible for discounted coverage.

Farmers have until June 1 to make new MPP coverage elections. MPP coverage will be retroactive to January 2018, and for more than 90% of the farmers previously enrolled in the program, coverage during 2018 is guaranteed to be profitable, i.e., program payments will be greater than the insurance premiums.

Newton said it’s widely known that despite milk prices falling by more than 50% since 2014, MPP offered very little financial support to the struggling dairy industry. Farmers paid nearly $100 million in premiums and administrative fees and received only approximately $12 million in program payments, representing a loss ratio of 12%. That all changed in 2018.

The Bipartisan Budget Act of 2018 modified MPP to make the program more affordable and to ensure more timely program payment delivery. The changes to MPP include calculating program benefits monthly instead of bimonthly, reducing the premium rates for Tier 1 coverage by as much as 80%, increasing the Tier 1 eligibility from 4 million lb. to 5 million lb. of covered milk and increasing the minimum catastrophic coverage level for small- and medium-sized dairy operations.

“To best demonstrate these changes, consider that under the old MPP $8 coverage cost 47.5 cents/cwt. for the first 4 million lb. of covered milk and $1.37/cwt. for coverage more than 4 million lb. For a farm covering 5 million lb. of milk, the old MPP would have cost over $30,000. Now, with the lower premium rate of 14.2 cents/cwt. for up to 5 million lb. of covered milk, $8 coverage costs slightly more than $7,000 – a reduction of 78%,” Newton said.

Covering 5 million lb. and under

Newton explained that changes to Tier 1 MPP coverage in the Bipartisan Budget Act will provide much-needed financial relief to farmers covering no more than 5 million lb. of milk. For farmers electing to cover more than 5 million lb. of milk, the benefits of participation will be lower due to the higher Tier 2 premium rates and should be carefully compared to other risk management options.

Based on 2017 enrollment data received from USDA’s Farm Service Agency, in 2017, 92% of enrolled dairy operations -- approximately 20,000 farms -- had a production history at or below 20 million lb. of milk. Because the minimum coverage percentage is 25%, these farmers would be eligible to elect coverage on up to 5 million lb. of milk and receive the maximum benefits provided by the improved Tier 1 provisions.

Guaranteed benefits at $8 coverage

While the enrollment period for the improved MPP runs from April to June 1, the coverage for 2018 will be retroactive to January. Newton said based on the data released by the U.S. Department of Agriculture, the February and March MPP margins were $6.88 and $6.77/cwt., triggering program payments of $1.12 and $1.23/cwt. for $8 coverage, respectively, and excluding sequestration of 6.6%. With a Tier 1 premium rate of 14.2 cents for $8 coverage – which is less than the dairy checkoff assessment – the net benefit of participation for February and March is 98 cents and $1.09/cwt., respectively.

“Importantly, even if MPP isn’t triggered for the rest of 2018, farmers covering no more than 5 million lb. under the $8 coverage level will have a positive return of 3.9 cents/cwt., or $1,950 for a farm covering 5 million lb. (including premiums, administrative fees and sequestration). For these farmers, the 3.9 cents/cwt. is guaranteed and can only get larger. For example, if April triggers a payment of $1.30/cwt., as projected, the net benefit of participation jumps to 14 cents/cwt., or $7,000, for a farm covering 5 million lb. of milk,” Newton said.

As of mid-May, USDA’s MPP decision tool forecasts MPP margins to remain below $8/cwt. through June 2018. Potential program payments of $1.30 in April, 84 cents in May and 13 cents in June are currently projected for $8 coverage (Figure).

If realized, $8 MPP coverage would have a net benefit of 21.6 cents/cwt., or nearly $11,000, for a farm covering 5 million lb. “Benefits of MPP participation would only increase if feed prices continue to rise or if milk prices falter going into the fall,” Newton said.

USDA - Farm Bureau



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