Part of each dairy operation's evaluation of the Foundation for the Future (FFTF) proposal is how it affects its own business. Both the Dairy Market Stabilization Program (DMSP) and Dairy Producer Margin Pro tection Plan (DPMPP) relate to each individual farm's production history and financial strategies, as well as current markets and supply and demand situations.

The Hoard's editors asked the National Milk Producers Federation staff to determine how FFTF would have affected the Hoard's Dairyman Farm during 2009 and 2010.

The assumptions used were:
Both programs would have been available beginning January 1, 2009.
Production history for the margin protection program is milk marketings in 2008. That was 4,970,797 pounds. With 90 percent coverage, the amount would be 4,473,717 pounds or an average of 372,810 pounds per month.

The basic DPMPP program pays the lesser of actual marketings or 90 percent of production history.

The supplemental margin protection pays the difference between the level of additional protection purchased ($2.50 per hundredweight on 90 percent of production history) above $4 per hundredweight on and the actual margin $4 or above.

The market stabilization base is the average of the three months immediately prior to the month the Secretary announces that milk check reductions will begin the following month and is fixed for as long as deductions continue. When deductions for this occurrence ends, should the program trigger in again, the three months prior to that announcement would be the base of that occurrence.

Market stabilization
The actual margins as calculated using the All-Milk Price minus the FFTF feed ration in 2009 was below $4 per hundredweight for eight consecutive months as shown in the table. However, what if the market stabilization plan had been available in 2009? The analysis by NMPF's Peter Vitaliano generated a reduction in milk volume based on each month's prices, costs, and required reduction relative to the base. This resulted in a different reduction percentage each month the program was active. As can be seen in the table, with the stabilization plan active, the margin would have been below $4 for three months of 2009 (January, February, and March) and below $6 for just two months of 2009 (October and November) which would have triggered the market stabilization plan for a second time that year with reductions in payments in January of 2010 after which the second market stabilization period would have ended.

The table shows a significant change in margins resulting from the DMSP program. This, in turn, results in greater revenue that more than offsets the cost of the program.

In the case of the Hoard farm, had the dairy not made any reduction in milk produced and marketed it all, there would have been three months of deductions from the farm's milk checks due to the DMSP program being in effect a total of four months (March and April in 2009 and January in 2010). Total deductions would have been $17,376. However, the resulting rise in milk revenues the farm generated from milk marketed would have been $139,978, before the $17,376 reduction, for a net gain in revenue of $122,602.

The market stabilization program would not have been triggered in 2010, but the change in feed costs toward the end of 2010 and into 2011 would have resulted in the program becoming effective again in March and April 2011. The base production for which the Hoard farm would have been paid 97 percent was 666,898 pounds or 93 percent of current month marketings, whichever was greater. Since we don't have their milk price for those two months, we can't calculate the cost.

Margin protection
The Hoard farm has chosen to purchase $2.50 supplemental coverage on 90 percent of its base history in addition to the basic coverage of $4 provided at no cost. The production history, fixed for the five years of the farm bill, is the highest of the three years preceding implementation of the program assuming January 1, 2009, for this example. From the numbers they provided, the production history would be 4,970,797 pounds of milk produced in 2008. Ninety percent of that is 4,473,717 pounds.

Supplemental coverage
The basic program pays up to 90 percent of the production history, but pays only on the actual production if it is less. The supplemental program pays the difference between $2.50 and the amount the average margin is above $4 on 90 percent of history, in this case.
The annual premium for an additional $2.50 supplemental protection is 23 cents per hundredweight. The Hoard farm annual premium would be $10,289.55 per year.

For 2009 and 2010, the basic program would have been in effect for two months, January and February 2009, with the average margin for those two months being $3.33 per hundredweight. Therefore, 67 cents ($4 minus $3.33) per hundredweight would have been paid each month on 372,810 pounds of milk. Total paid would have been $4,996.

The supplemental coverage would have paid out in 8 of the 12 months of 2009 for a total of $35,715. Combined with the basic payment, the farm would have received a total of $40,711 in 2009.

In 2010, there would have been no basic payments, but the supplemental coverage would have generated a total of $4,101 resulting from payments for November and December.
In 2011, the supplemental coverage would have provided a payment for January and February totaling $10,215.

In summary, here are the results for the Hoard farm had the market stabilization and margin protection plans been in place in 2009 and 2010:
  • Through the DMSP, total reduction in milk checks would have been $17,376.
  • Net increase in revenue from better milk prices would have been $122,602.
  • Total margin protection premiums 2009 through 2011 to date equaled $30,868.65.
  • Total payments received (2009 through 2011) would have been $55,027.
  • Net change in farm revenue would have been a plus $146,760.

This article appears on page 451 of the July 2011 issue of Hoard's Dairyman