Little time left to decide on MPP-Dairy program

Farm Forum

Until recently, the final day to sign up for the Dairy Margin Protection Plan (MPP-Dairy) was Nov. 28, but that day being Black Friday, the deadline was extended to Dec. 5.

Many of my North Dakota readers already have attended informational meetings and likely have made a decision, but some have chosen to ignore this program for philosophical reasons or busy schedules.

However, a change is in the market winds: Just listen to the lament about the drop in corn prices! Not that long ago, I overheard some producers suggest the demand for food never would let prices fall drastically.

I never will start a market column; I leave making predictions to others. Nonetheless, I must note that the futures market appears to expect milk prices to change. Declining cash prices are moving closer to the already discounted futures. While the weakness in dairy product prices is not likely to change anytime soon, U.S. and world milk production is increasing, and product availability is keeping world prices low. Furthermore, U.S. products are having difficulty competing on the world market due to high prices.

So back to the MPP-Dairy program. Wisconsin-based commodity trader Robin Schmahl offered the following program observation about the Livestock Gross Margin-Dairy (LGM-Dairy) and MPP-Dairy programs:

“Because LGM-Dairy is based on futures prices (rather than the national average price calculation in MPP), allowing producers to vary feed inputs, it is anticipated quite a number of dairy producers will opt to implement an LGM-Dairy policy or policies this year with the ability to capture a higher income over feed cost. The issue here is that it is anticipated the appropriated money for the LGM-Dairy program could be used up quickly, which then would require producers to pay the full amount of the insurance premium for the program. After the latest LGM sign-up last weekend, there is slightly less than $3.5 million remaining to subsidize the program, with this expected to be used up during the December offering unless there is some redistribution of funds.”

Many who study dairy markets concur that signing up for the MPP program would be wise if you do not use LGM-Dairy. In our educational meetings, the consensus was that if you do nothing else, simply pay the $100 to have the $4 level coverage. Then use futures, options and forward contracts to protect your milk and feed margin this next year.

This allows you to take advantage of the first production bump in 2015. It also gives you the ability to protect a greater than $8 level income over feed cost by using futures or options for milk and feed.

If you choose to pay higher premiums to increase your income over feed cost using MPP, then decisions remain. For larger farms that have milk production greater than 4 million pounds, Schmahl suggests only purchasing higher margin protection on 4 million pounds and utilizing the futures markets to protect your margins above that level due to the substantial increase in premiums on milk production above that level.

Remember, MPP or LGM-Dairy should not be used as a stand-alone marketing program. These programs protect milk and feed margins. They do not protect against lower milk prices or higher feed prices. A marketing program should be designed using a combination of the tools available.

So my take-home message is: You do not have much time left if you plan to get on board with MPP-Dairy. My feeling is that dairy owners do not want to miss this deadline for pending market reasons. Moreover, if you still have philosophical reservations, simply think of this program as what it is: a risk management program, not an entitlement program.

Grain marketers used to talk about short markets having long tails. The rigors of 2009 still are vivid in the minds and bank accounts of many dairy farms. It was brutal. For the first time in the history of dairy program support, you can purchase some insurance or protection against catastrophic market events.

In my nearly 40 years of service to agriculture, this is the first time you can buy a little insurance. It’s protection that you hope you never have to use. Don’t you wish you had this protection five years ago?

Remember, you have only until Dec 5, so visit your Farm Service Agency office and take a little pressure off 2015.