USDA Announces Seven Day Dairy Margin Extension
The USDA announced yesterday a seven-day extension for dairy farmers to sign up for the new dairy margin protection program (DMPP). The original due date for farmers to sign up for both 2014 and 2015 was November 28, 2014. The additional extension means that farmers now have until December 5, 2014 to sign up for the program.
The DMPP allows dairy farmers to insure margins between $4 and $8 per cwt for the remainder of 2014 (it began September, 2014) and for all of 2015. As previously discussed in several posts, locking in a $4 margin costs the farmer nothing (other than a $100 administration fee). The cost increases as additional protection is added up to $8 per cwt in 50 cent increments.
Protection levels under 4 million pounds (on an annual basis) are subject to much lower premiums, while coverage over that level is subject to higher premiums. Farmers would most likely either elect the minimum $4 coverage levels (when margins are high like 2014 and most likely 2015), while a coverage level near $6.50 is better when margins are expected to contract (2016?). Although coverage levels at the $8 level may net the farmer more net revenue, the extra cost to insure this is probably not worth getting slightly less at the $6.50 level.
For example, assume a farmer insures their production at the $8 level versus the $6.50 level. The cost to insure their production is $400,000 and $125,000, respectively. At the end of the year, the $400,000 premium nets the farmer $400,000 after deducting the cost of the premium. The $6.50 level nets the farmer $375,000 which is $25,000 less than the $8 level, however, the farmer only had to shell out $125,000 of premium costs. I think most farmers would prefer that result.
The dairy farmer, unlike crop producers can make the election each year. The current deadline is for 2014 and 2015 production.
The only major penalty for dairy farmers not to sign up for 2014 production is the loss of the .87% bump in production coverage for 2015.
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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