Debate over the future cost of the Margin Protection Program for Dairy (MPP-Dairy) has ramped up in recent weeks. The official scorekeeper of federal government program outlays, the Congressional Budget Office (CBO), has shown much larger costs with some of the proposed changes to MPP-Dairy in the next farm bill.

Scoring the future cost of any federal program related to the dairy industry remains extremely difficult because of the uncertainty and volatility of milk prices. As a result, CBO looks at a range of possible milk prices in scoring policy alternatives. The average of the range of outcomes is reported by CBO as the expected cost of a policy proposal.

The level of program participation is perhaps the toughest issue to address with a relatively new program like MPP-Dairy. With little history regarding dairy farmer participation in MPP-Dairy, analysts must make an educated guess on participation. The educated guesses prior to the MPP-Dairy passage suggested $6 to $6.50 as the “sweet spot” of participation with more than two-thirds of production history expected to sign up at that level.

The small amount of actual MPP-Dairy data does not confirm these assumptions. First, producers have signed up at lower levels of margin coverage than the original “sweet spot.” In 2016, only 9 percent of covered production history was signed up at a $6 or $6.50 level. Second, 88 percent of production history covered was signed up at the low $4 catastrophic level. This option was chosen by dairy farmers even with many experts predicting 2016 to be a financially stressful year when the sign-up occurred.

USDA outlays for May/June 2016 MPP-Dairy payments totaled $11.2 million. If 70 percent of the 2016 covered production history had chosen a $6.50 coverage level, USDA outlays for the May/June 2016 period would have been more than $135 million. If the same 70 percent of covered production history choice is coupled with the lowest bimonthly margin recorded in 2009 ($2.49), the outlays would have totaled more than $850 million.

There appears to be growing evidence that participation in the MPP-Dairy is less than many economists predicted, and this should reduce the expected cost of the MPP-Dairy. However, 2009 reminds us that MPP-Dairy program expenditures could be in the billions of dollars. Both sides of this issue must be taken into account when determining future MPP-Dairy costs.

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(c) Hoard's Dairyman Intel 2017
April 10, 2017
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