Farm Bill Makes Significant Changes to Margin Protection Program for Dairy

Note: USDA has created a new decision tool for the new Dairy Margin Coverage program.

For decades Congress has created and modified risk management programs to help producers combat changes in production costs and low profits. In the 2014 Farm Bill, Congress created the Margin Protection Program (MPP) for dairy.[1] This was a voluntary risk management program for dairy producers. Dairy producers would select a coverage level and amount of production covered. When the difference between the average farm price of milk and the national average feed costs dropped below a certain dollar amount, payments would be provided to producers. Coverage levels started at $4.00/cwt and increased in $0.50 intervals up to $8.00/cwt.

Congress created MPP with the intent to provide insurance against both low milk prices and high feed costs. However, many producers felt the program failed to live up to these expectations when producers did not receive payments significant enough to offset the costs of enrolling in the program. For example, some estimate that farmers paid $75 million more in premiums than were received in payments.[2]

The Agriculture Improvement Act of 2018, passed by Congress this past December, made several changes to the MPP. The first notable change was the switch to a new name. MPP would now be called the Dairy Margin Coverage (DMC) program.[3] Similar to MPP, a producer continues to choose at what margin she would like to be covered and at what percentage of production.

Another major change is the pricing structure. DMC provides coverage at 5 million pounds or less (Tier 1) for a small administrative fee and adds margin coverage at higher levels of production. For $100, a producer can receive coverage at $4.00/cwt. Additional coverage may be bought for $4.50/cwt to $9.50/cwt.[4] For production over 5 million pounds (Tier II), prices vary depending on the margin chosen. Producers in either Tier may choose to cover 5% to 95% of their production.

Overall, Tier I will have lower payments under DMC than MPP in order to encourage dairy farmers to choose higher levels of coverage. From 2015 through 2017, 24,748, 25,663, and 20,314 dairy operations enrolled in MPP. During those years, 56%, 22.5%, and 7.4% of producers enrolled at coverage levels of $4.50/cwt or higher.

Under DMC, a producer may annually choose a coverage level. However, producers will receive a 25% discount on premiums if they commit to five years of a selected coverage.[5] DMC also allows for reimbursement of MPP premium payments less any payments received.[6] If the reimbursement is used for DMC payments, the producer may receive up to 75% of the MPP payments made.[7] Otherwise the producer may receive up to 50% of the payments made.[8] Unlike MPP, producers may choose to participate in both DMC and Livestock Gross Margin for Dairy Program. DMC is authorized through December 31, 2023.[9]