Milk producers are caught in a difficult market right now, and individual dairy farmer numbers are dropping.
In the federal milk marketing order that covers part of Indiana, Michigan, Ohio and Pennsylvania, the number of dairy farms in January was 4,311, down 411 farms in one year.
But Dr. Marin Bozic, a dairy economist with the University of Minnesota, says there’s something all milk producers can, and should, do to help their bottom lines: sign up for the new dairy revenue protection program.
“This is a program that will improve your bottom line.”
Bozic spoke via a web presentation to Ohio Dairy Producers Association members April 4 at their annual meeting in Wooster.
“Everybody has been battered the past few years,” Bozic said. “This is a program that will improve your bottom line.”
New Dairy Margin Coverage program
Dairymen, however, are gun shy, because payouts in the previous program, the Margin Protection Program for Dairy Producers (MPP-Dairy) created in the 2014 farm bill, didn’t happen as they had hoped.
Bozic calls the new program, renamed Dairy Margin Coverage, a “game changer,” and says it could help some dairies stay in business that otherwise would be selling the cows.
Basically, it’s “crop insurance for milk,” he explained. The program doesn’t offer a higher price for your milk, but allows you to smooth out that price over time.
If the voluntary program had been in place the past four years, he calculates the net benefit in 2018 would’ve been more than $1 per hundredweight.
Dairy Margin Coverage makes payments when the national average income-over-feed-cost margin falls below a farmer-selected coverage level. Coverage is available from $4 per hundredweight to as high as $9.50 per hundredweight.
Dairy producers pay low premiums for coverage and may annually re-select their coverage options. There are discounts for consistent use.
Program payments are based on the amount of milk covered in the program and may range from 5 percent to 95 percent of a farm’s milk production history in 5 percent increments.
The program also includes a partial rebate of net MPP premiums paid for 2015 to 2017, and there are no longer restrictions on combining the new program and crop insurance programs on the same milk.
Think long term
The risk management strategy works best, Bozic added, if you hedge your milk prices long term, and not just the next quarter. The new program allows farmers to price up to five quarters out.
If you buy protection only the next three months? The economist said you’ll be “very disappointed.”
His calculations, had the program been in place the past 10 years, or 40 quarters, show that 1 in 3 quarters would pay out. Taking the long-term approach, though, lets milk producers protect large volumes of milk.
The program also benefits herds of all sizes, and Bozic encouraged the dairymen to consider the coverage “especially if you have less than 250 cows.”
Research by Ohio State University’s Carl Zulauf and Michigan State University’s Christopher Wolf found, when measured by $/cwt., the 2018 dairy policy changes most benefit small dairy farms.
The program is not, however, going to automatically push a farm into the black. Zulauf and Wolf calculations show no farm size has 2014-2017 losses turned into profits had the program been in place the past four years, but it would’ve reduced the losses. In fact, for herds of 200-499 cows, the loss declined by almost 41%.
Bozic anticipates 30 to 50% of the U.S. milk will be covered under the new program.
Other market factors
Bozic also reviewed other economic factors impacting the current and future dairy market, including the China trade deal and the U.S. Mexico Canada Agreement that is replacing the North American Free Trade Agreement, or NAFTA.
Ohio milk producers shouldn’t ignore the impact the global market and trade has on their farms, the economist said. Exports have been absorbing most of the growth in U.S. milk production over the past decade. The rule of thumb is that the milk production from one day out of each week goes to export, but on a milk-fat basis and skim-solids basis, it’s even higher.
Even though cow numbers are falling, overall production has increased, which makes the export markets more valuable in light of declining domestic milk use.
“We need to capture world markets,” Bozic said. “Free trade, market access is very important to us.”
But Trump administration trade strategies hint to him that “the system of free trade that we’ve come to rely on is going away.”
Bozic said the shift is from multi-national trade agreements to single country trade agreements. In the long run, the U.S. will secure more market access for dairy and other agricultural products, but it will take some time.
“It’s going to be a rocky road.”