People in the dairy industry, including dairy attorneys, are buzzing about the Foundation for the Future ("FFTF"), National Milk Producers Federation's four point plan to revitalize the industry. The key to the program, in my opinion, is the movement away from price protection to margin protection. The establishment of a producer margin protection program is the second piece of the FFTF plan.
I wanted to take some time to dissect the proposed margin guarantee program and its operation. This article does not necessarily reflect my opinions or those of my clients. The information here is drawn from NMPF statements and documents explaining FFTF.
The Dairy Producer Margin Protection Program ("DPMPP"), as its name suggests, would work to protect producers when the combination of low prices and high costs of production erode the profitability of dairy farm operations. This is a marked difference from existing federal safety net programs, which focused only on the price that dairy farmers received for their milk, while ignoring the cost to produce milk. FFTF has been developed using a realistic modeling of feed costs for dairy farms, which will become the formula for the feed costs under the program. FFTF also explains how the Congressional Budget Office will determine expected milk prices for the term of the program's operation will be determined.
The DPMPP would be a two-tiered program. Using the anticipated milk prices and anticipated feed costs, an expected margin will be calculated. That expected margin will be compared to actual margins, measured by realized milk prices and the modeled feed costs. When the actual margins fall below the expected margins, one or both of the DPMPP tiers would provide payments to covered producers.
Under the base tier, producers would receive payments when the expected margin falls below 50% of its predicted level. While participation in the base program is voluntary, it will be offered to producers at no cost. Eligible producers will be able to cover up to 90% of their production. The base program is intended to cover only catastrophic periods of low margins.
Under the supplemental tier of the program, producers could elect to insure their margins not covered by the base plan, up to 90% of production levels. The premium for this option coverage would be partially subsidized by USDA. As the producer guarantees a higher margin, the amount of the subsidy would decrease.This summary explains the general operation of the DPMPP. As would be expected, there are many details that have not been addressed here. If you are interested in any of those details, including the mechanics of the calculations under FFTF and the eligibility of producers under the DPMPP, I suggest you send me an email or visit the FFTF informational website. Examples of how the program is intended to operate has been prepared by NMPF and can be found on their website in a PDF download.