Dairy Margin Protection Program Update
I spent Friday in Denver (I found wearing shorts to Denver this time of year may not be a good idea since it was “cold”) getting training on the new Dairy Margin Protection program. The various state universities involved in the online tools development have done a very good job of providing good information that should allow you to make an informative decision. Dairy producers have until November 28, 2014 to sign up for 2014 (September to December) and for 2015. Most likely there will be no payments for 2014, so most producers will make a decision to either sign up for 2015 by that date or wait until later next year to sign up for 2016.
Under current estimated milk prices and feed costs for 2015, there is a very slim chance that any payment would be made in 2015. Therefore many dairy producers would probably make a decision not to sign up until next year. However, there are two reasons why it may make sense to sign up now.
- The cost of signing up for the very lowest margin protection of $4 is $100. This is the annual fee that the USDA will receive for administering the program. This is a fairly cheap cost to insure against very low margins. Also, since the program provides for payments during 2 month chunks of time, there may be a case where one or two payments could be made to offset your premium costs.
- By delaying you lose the ability to adjust upward your production history for 2015. Your Production History (PH) is the highest of your actual production for 2011, 2012 or 2013. If you sign up for 2015, you are allowed to update this PH by multiplying it by 1.0087. This would increase the amount of protection that would be available.
The rules regarding the new Dairy Margin Protection program have still not been finalized. Most of the confusion surrounds how “affiliated” farms will handle their production history and related premium options. The goal of FSA appears to get these rules issued by the time the 2015 sign up is completed.
The consensus was that premium pricing for 4 million pounds of production is by far the best deal for dairy producers. For larger farmers, the higher premiums may make the choice tougher. The consensus also was that the $6.50 premium level was most likely a better deal than even $8. Although $8 netted a dairy producer slightly more than the $6.50 level on a historical basis, the premium outlay at the $8 level was almost 4 times higher than for the $6.50 level. Under one example we reviewed the net gain for a good size producer in 2009 (when the maximum payment would be made over the last 15 years). For the $6.50 to $8.00 level, the net gain to the producer was about $700,000 (payouts in excess of premiums paid), however, the $8 level required an upfront premium of almost $400,000 whereas the $6.50 level only required a premium slightly in excess of $100,000.
Since farmers have until November 28 to make a decision this year, it will pay to wait as long as possible before signing up. However, don’t wait till the last day to make up your mind and spend some time now using the online tools available. It will be worth your while.
The online tools provided by the FSA are located here.
Additional online analysis is available here.
Paul Neiffer, CPA
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
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