Margin Protection for Dairy Producers
Dairy farmers are now starting to enjoy healthy margins after several years of either breakeven or loss margins. The new farm bill provides margin protection for dairy farmers. This margin protection is calculated based on the difference between the “all-milk price” and average feed cost. Average feed cost is calculated as the sum of the price for:
- 1.0728 bushels of corn, plus
- .00735 of a ton of soybean meal, plus
- .0137 of a ton of alfalfa hay
Therefore, if corn is trading for $4.50 per bushel, soybean meal is trading at $400 per ton and alfalfa hay is trading at $220 per ton, the components would be as follows:
- Corn $4.83
- Soybean meal $2.94
- Alfalfa $3.01
Adding these three components together, we get an average feed price of $10.78. The margin that a dairy farmer can lock in is between $4 and $8 per cwt. In our example, if the all-milk price is greater than $18.78, there would be no payment to the dairy farmer. If the price is between $14.78 and $18.78, there may be a margin payment depending on the coverage level elected.
The farmer may make an annual election to obtain margin protection in increments of 50 cents. If they elect $4 margin protection, there is no premium owed. Between $4.50 and $8 of margin protection, a sliding scale premium will be owed on an annual basis as follows:
|
Producer Premiums |
|||
|
Less Than |
More Than |
||
|
4 Millions Lbs |
4 Millions Lbs |
||
|
Coverage |
Premium |
Premium |
Percentage |
|
Level |
Per Cwt. |
Per Cwt. |
Difference |
| $ 4.00 |
None |
None |
|
| $ 4.50 |
$ 0.010 |
$ 0.020 |
100% |
| $ 5.00 |
$ 0.025 |
$ 0.040 |
60% |
| $ 5.50 |
$ 0.040 |
$ 0.100 |
150% |
| $ 6.00 |
$ 0.055 |
$ 0.155 |
182% |
| $ 6.50 |
$ 0.090 |
$ 0.290 |
222% |
| $ 7.00 |
$ 0.217 |
$ 0.830 |
282% |
| $ 7.50 |
$ 0.300 |
$ 1.060 |
253% |
| $ 8.00 |
$ 0.475 |
$ 1.360 |
186% |
The farmer can elect coverage between 25% and 90% of production with the premium being adjusted accordingly. The program is scheduled to start September 1, 2014 and a program payment will be made based upon the average margin during a two month period. The periods are Jan/Feb, Mar/Apr, May/Jun, Jul/Aug, Sep/Oct, and Nov/Dec. If the average margin for any of these two months falls below the coverage level elected by the farmer, then a payment will be made based upon his level of coverage and production history.
This is a brief summary of the new dairy margin program which will replace all of the current dairy programs. For large producers, it may not make sense to elect $8 coverage on an annual basis when the farm is locking in $4 of protection at a $1.36 cost. However, at the $6 level, the cost is now $.155 per year for an extra $2 of coverage. A farmer will need to run their numbers and see which coverage makes the most sense. Unlike ARC or PLC where the farmer is locked in for all five years (2014-2018), the dairy margin program allows farmers to change their mind each year.
We will keep you posted.
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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