The author is a research assistant extension professor in the department of agricultural and applied economics at the University of Missouri.

There is growing discussion around needed changes to the Margin Protection Program for Dairy (MPP-Dairy) as the next farm bill debate nears. Current agricultural policies must always be evaluated as the dynamics of agricultural markets change over time and MPP-Dairy is no different.

It remains important to understand how the current program works before better alternatives can be found. Changes to MPP-Dairy can make the program better but will likely raise government outlays.

A simple example can shed light on how MPP-Dairy would have operated had it been in existence since 2000. If a dairy producer with a production history of 4 million pounds had chosen $6.50 MPP-Dairy coverage every year beginning in 2000 they would have seen a net gain from the program of about 18 cents per hundredweight of covered production. This shows that MPP-Dairy payments made more than offset the premiums paid into the program had it been in operation from 2000 through 2016.

MPP-Dairy is a margin insurance program, and it tends to operate like other insurance products. MPP-Dairy would not have paid often over the 2000 to 2016 period, but when it would have, it would have resulted in large payments for short periods of time like traditional insurance products. The periods of 2002 to 2003, 2009, and 2012 to 2013 stand out over the 2000 to 2016 period where the largest MPP-Dairy payments would have occurred.

Dairy producers have shown that they will adjust their annual coverage level depending on their expectation of future margin levels for the next year. However, they must evaluate these changes in coverage levels carefully as the example here shows that just eliminating the payments received in 2009 would have reduced the expected benefit of MPP-Dairy by more than 66 percent.

The 18-cent benefit over the 2000 to 2016 period may seem small, but the level is in alignment with the expected budget scoring of the MPP-Dairy program provided by the Congressional Budget Office during the 2014 farm bill debate. In this example, the 2016 payments for a 4 million pound production history operation that chose the $6.50 coverage level will add nearly $1,000 to the bottom line despite making a payment in only one bi-monthly period.

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(c) Hoard's Dairyman Intel 2016
September 12, 2016
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