While the Margin Protection Program for Dairy (MPP-Dairy) has been getting most of the publicity, the recent improvement in milk futures prices is pulling the Livestock Gross Margin for Dairy (LGM-Dairy) program back into risk management strategies for larger producers.
Meanwhile, there’s been no news regarding the launch of a new program, Revenue Protection-Dairy (RP-Dairy), which received the green light from the Federal Crop Insurance Commission earlier this year. The American Farm Bureau Federation and American Farm Bureau Insurance Services developed the new insurance product for dairy farmers. Similar to crop revenue protection policies, Dairy-RP would protect against unexpected declines in milk prices, unexpected declines in milk production, or both.
Dairy economists have said the policies should be available this summer, but crop insurance providers have not yet received information to develop and sell RP-Dairy policies.
Protecting Your Profits call
With the enrollment deadline for the 2018 MPP-Dairy program stil about one month away, Alan Zepp, risk management program manager at Pennsylvania's Center for Dairy Excellence (CDE), reviewed various risk management options during his monthly “Protecting Your Profits” conference call, April 25. Depending on herd size and milk production volumes, available tools have differing economic impacts.
As of late April, the LGM-Dairy insurable margin for the 10-month period (June 2018 through March 2019) averaged $6.86 per hundredweight (cwt). Cost for coverage for the entire period was estimated at 58 cents per cwt for a zero deductible policy; 16 cents for a $1 deductible policy. The April LGM-Dairy sales period is April 27-28; the May sales period is May 25-26.
At the time of the call, Chicago Mercantile Exchange (CME) Class III futures contracts for the remainder of 2018 averaged just over $15.75 per cwt, up about 50 cents per cwt from a month ago, but still well below the five-year average of $17.42 per cwt. The Class IV futures projected average was $15.44 per cwt, $1.25 higher than recent months.
An October 2018 Class III futures contract was trading at $16.52 per cwt on April 25. A $16.50 per cwt at-the-money put cost 65 cents per cwt; a $15.50 put option, similar to a $1 deductible LGM-Dairy policy, cost 26 cents per cwt.
The economic comparison between MPP-Dairy and LGM-Dairy depends on herd size. With changes in the MPP-Dairy Tier I premium schedule, MPP-Dairy coverage is far more economical for smaller producers. Given current conditions, dairy producers insuring $8 per cwt margins on 5 million pounds of milk would cost about 14 cents per cwt under MPP-Dairy, compared to 58 cents per cwt under LGM-Dairy.
In contrast, dairy farmers paying Tier II MPP-Dairy premiums at the $8 margin level would pay 58 cents per cwt for a zero deductible policy under LGM-Dairy, but $1.36 per cwt under MPP-Dairy.
MPP-Dairy enrollment
Cynthia Walters, program director with the Pennsylvania USDA Farm Service Agency, updated producers on changes to MPP-Dairy. Enrollment for the 2018 program remains open until June 1, so dairy farmers considering participation in MPP-Dairy have time to weigh options before selecting margin coverage levels. Farmers who already enrolled for 2018 also have the option to change coverage levels at anytime prior to June 1, she said.
Monthly MPP-Dairy margins are generally announced in conjunction with USDA Ag Prices reports near the end of each month. With the 2018 program retroactive to January, actual MPP-Dairy margins will be available for January-March by about April 27. The May Ag Prices report is scheduled for Tuesday, May 30, just before the June 1 deadline. So, April MPP-Dairy margins could be known by the enrollment deadline.
Currently, it appears dairy farmers purchasing margin coverage at Tier I (5 million pounds or less of milk) premium levels could recoup an entire year’s premiums with just two months’ (February-March) indemnity payments. February 2018 MPP-Dairy insurable margins already guarantee a payment for those who elect coverage at $7.50 and $8 per cwt levels, with payments also all but assured for several more months. And, MPP-Dairy premiums are not due until September.
Read: MPP-Dairy payments could return premium costs quickly
Market fundamentals
Zepp’s overview of market fundamentals suggests milk prices appear to be moving past the bottom for 2018. U.S. cow numbers have been stable, but milk production per cow continues to uptick slightly. Cow slaughter is up slightly compared to a year ago, but there hasn’t been a massive herd liquidation. U.S. dairy product inventories continue to grow.
There are positive signs for both domestic and export demand. U.S. consumer confidence remains strong. The U.S. dollar remains weaker against other currencies, helping fuel U.S. dairy exports.
U.S. dairy product prices are competitive on the world market. The current CME cash cheddar price of $1.60 per pound was less than the latest Global Dairy Trade (GDT) auction price of $1.67 per pound and the European Union (EU) price of $1.78 per pound. CME butter was trading about $2.32 per pound, below the GDT average of $2.63 per pound and the price in Germany of $2.99 per pound. Finally, the CME nonfat dry milk powder was trading at about 81 cents per pound, compared to the GDT average of 84 cents per pound and 73 cents per pound in Germany.
Globally, milk production is slowing, Zepp said.
Zepp’s next Protecting Your Profits call will be May 23, preceding the May LGM-Dairy sales period and the MPP-Dairy enrollment deadline. All calls are recorded and archived. 
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Dave Natzke
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- Progressive Dairyman
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