A plan in the new U.S. farm law to help dairy farmers limit losses from rising feed costs or falling milk prices may become a model in coming years for livestock producers who have resisted similar types of insurance.
The plan, called the Margin Protection Program, takes a page from the popular multibillion-dollar government-backed crop insurance programs for grain, cotton and other crops. In short, MPP will create formulas to insure against loss of "revenue" rather than actual loss of animals.
Cattle and hog producers have traditionally rejected government risk-management schemes because they abhor any idea of government controls. However, in natural disasters, they have accepted federal aid payments.
But the thrust of the 1,000-page Agricultural Act of 2014, signed into law Feb. 7, was to move away from "direct payments" toward more elaborate insurance coverage. The dairy program aims to convince not just dairy farmers but all livestock producers they can benefit as crop producers have.
"In the past we've had our program tied to the price of milk and only the price of milk. This recognizes that it's more important to look at the margin between the price of milk and feed costs," said Chris Galen of the National Milk Producers Federation.
"We've learned the last five years in the entire livestock sector, not just dairy, when feed prices are high and your commodity price is low, whether it's milk or pork or beef or eggs or chicken, you can really lose a lot of money in a hurry," Galen added.
The U.S. Department of Agriculture is working to launch the program for the country's 47,000 commercial dairy farms by Sept. 1.
"As long as USDA implements the margin insurance proposal under the dairy title in the fashion intended by Congress then clearly we are going to have a much stronger safety net for farmers," said Michael Marsh, chief executive of Western United Dairymen, whose members produce 60 percent of the milk in California, the top dairy state.
Marsh said MPP will be critical in California, which faces its worst drought in a century. The state lost 25 percent of its dairy farmers from 2008-2012, squeezed by low milk prices and soaring grain costs.
"It was year after year after year of negative margins that drove so many of them to bankruptcy," Marsh said.
Under MPP, dairy farmers will be able to choose how much of their annual milk production to cover, from 25 percent to 90 percent, and set profit margins using a federal formula taking into account feed costs as well as milk prices. Margin coverage will be available from $4 to $8 per hundred pounds (cwt).
"They want to help dairymen manage margin risk and shift them into an era of having some skin in the game similar to crop insurance," said John Newton, a University of Illinois dairy economist. "This is the first attempt to get them to understand the benefits of managing their margin."
As with crop insurance, USDA will pay part of the insurance premiums and underwrite payouts if profit margins fall below targets for two consecutive months.
Even so, many non-dairy farmers wary of government "controls" look likely to remain a tough sell.
"It's doubtful that we would look at any success of any type of pilot program within dairy," said spokesman Colin Woodall at the National Cattlemen's Beef Association. "We spend most our time trying to get the government out of our business. The last thing we want is to invite them in, especially in any sort of revenue guarantee or insurance type program." (Reporting by Christine Stebbins; editing by Alden Bentley and David Gregorio)