2018 Farm Bill Primer: Dairy Programs

2018 Farm Bill Primer: Dairy Programs

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April 24, 2019
2018 Farm Bill Primer: Dairy Programs
The 2018 farm bill (P.L. 115-334) revised the dairy
free at the $4.00, $4.50, and $5.00 margins levels; and
program from the 2014 farm bill (P.L. 113-79, as amended
reduce premiums for Tier I (raised to 5 million pounds)
by the Bipartisan Budget Act of 2018 [BBA], P.L. 115-
coverage. As a result, USDA paid participating diary
123). The new program in the 2018 farm bill, Dairy Margin
producers almost $254 million in 2018.
Coverage (DMC), which replaces the Margin Protection
DMC Under the 2018 Farm Bill
Program (MPP), is designed to improve the safety net for
The DMC program is similar to MPP in that it is to pay
milk producers. Many dairy producers assert that MPP
participating dairy producers when monthly margins fall
failed to provide a sufficient safety net during the 2014
below producer-selected levels. The DMC milk price and
farm bill period, when low milk prices did not trigger
the feed ration cost margin formula is unchanged from
program payments. DMC is scheduled to be in effect from
MPP. DMC is potentially more attractive for dairy
January 1, 2019, through December 31, 2023.
producers because they will be able to buy higher margin
protection at a lower price than under MPP.
U.S. dairy producers have faced low milk prices in recent
years, leading to financial stress and significant departures
DMC provides higher margin choices for the first 5 million
from dairying. According to the U.S. Department of
pounds (Tier I) of milk production (Table 1). If dairy
Agriculture (USDA), since 2013 the number of licensed
producers opt to participate in DMC, they pay a $100
dairy herds has declined by 20%, from 46,975 to 37,468 in
annual administrative fee and are automatically covered at
2018.
the $4.00/cwt margin. They have the option to buy
additional margin coverage ranging from $4.50/cwt to
Margin Protection Program (MPP)
$9.50/cwt on Tier I production. MPP allowed producers to
The original MPP program under the 2014 farm bil made
purchase margins only up to $8.00/cwt. Under DMC, dairy
margin payments to participating dairy producers when a
producers who want to buy margin coverage for milk
formula-based national milk margin—calculated as the
production over 5 million pounds (Tier II) may buy up to
difference between the national all-milk price and a national
the $8.00/cwt level, unchanged from MPP. DMC raised the
average feed ration (corn, soymeal, and alfalfa hay) cost—fell
premium payment rates for Tier II margin coverage above
below a producer-selected margin that ranged from $4.00 per
the $5.50/cwt level.
hundredweight (cwt) to $8.00/cwt for two consecutive
months. In addition, dairy producers selected coverage that
Table 1. DMC Premium Rates Compared to MPP
ranged from 25% to 90% of their milk production history. To
$ per cwt
participate, producers paid a $100 annual fee and were

Tier I
Tier II
charged premiums for margin protection above $4.00/cwt.
Up to 5 million lbs.
Over 5 million lbs.
Premiums rose with higher margin protection levels and
Margin
MPP
DMC
MPP
DMC
greater milk production coverage. To aid small milk
$4.00
$0
$0
$0
$0
producers, premiums were lower for the first 4 mil ion
pounds of milk production (Tier I) and higher for production
$4.50
$0
$0.0025
$0.020
$0.0025
above 4 mil ion pounds (Tier II). MPP was subsequently
$5.00
$0
$0.005
$0.040
$0.005
amended by the BBA in 2018 to raise production coverage,
$5.50
$0.009
$0.030
$0.100
$0.100
lower premiums, and incentivize greater participation. See
CRS Report R43465, Dairy Provisions in the 2014 Farm Bill (P.L.
$6.00
$0.016
$0.050
$0.155
$0.310
113-79); and CRS In Focus IF10833, Dairy Provisions in the
$6.50
$0.040
$0.070
$0.290
$0.650
Bipartisan Budget Act (P.L. 115-123).
$7.00
$0.063
$0.080
$0.830
$1.107
MPP Under the 2014 Farm Bill and the BBA
$7.50
$0.087
$0.090
$1.060
$1.413
In 2014, the U.S. all-milk price averaged $24.00/cwt. By
$8.00
$0.142
$0.100
$1.360
$1.813
2018, the average price was just over $16.00/cwt, a 33%
$8.50
NA
$0.105
NA
NA
decline. However, feed costs also declined, and MPP
$9.00
NA
$0.110
NA
NA
payments were seldom triggered. From March 2014
through 2017, the national monthly milk margin averaged
$9.50
NA
$0.150
NA
NA
$9.73/cwt, and payments were triggered four times. During
Source: MPP: P.L. 113-79, as amended by the BBA, P.L. 115-23;
this period, dairy producers paid almost $100 million in
DMC: P.L. 115-334.
administrative fees and premiums to participate, while
USDA paid out about $12 million in margin payments.
Under DMC, dairy producers may cover a greater
percentage of their milk production history: from 5% to
The BBA amended MPP to make payments on a monthly
95%, compared with 25% to 90% under MPP. DMC
rather than a two-month average; make margin coverage
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link to page 2 2018 Farm Bill Primer: Dairy Programs
production history continues to be based on the highest
Timeline
annual milk marketings in 2011-2013 but is to be adjusted
USDA updated its 2018 farm bill implementation schedule
to reflect growth through 2018. Production history for new
on April 12, 2019 (Table 2). The agency has completed two
dairies may be determined by any available year of
final rules and has indicated that other actions will be
production or an adjusted partial year. DMC did not provide
implemented by May. Signup for DMC will open in June
for updating production history to recent years.
and continue through September 2019.
DMC allows dairy producers to select margin and
Table 2. Timeline for Dairy Provision Implementation
production coverage levels annually. In addition, under
March 1, 2019
Dairy Forward Pricing Program final rule
DMC producers will receive a 25% discount on premiums
issued.
if they select and lock in their margin and production
March 11, 2019
Class I Skim Milk Price final rule issued.
coverage levels for the entire five years of the program.
March 22, 2019
Dairy producers enrol ed in LGM-Dairy in
The 2018 farm bill also addressed producer dissatisfaction
2018 may retroactively participate in MPP.
with MPP. Dairy producers may apply for partial
March 28, 2019
National Agricultural Statistics Service
repayment of the premiums, less any payments received,
released prices for high-quality alfalfa hay
that they paid under MPP during 2014-2017. If dairy
for top five milk-producing states.
producers opt to apply eligible repayments to future DMC
By May 1, 2019
Farm Service Agency wil offer MPP
premiums, they receive credit for 75% of the repayment, or
premium reimbursements to dairy
they may opt for a direct cash payment of 50% of the
producers.
eligible repayment.
By May 1, 2019
The decision tool wil be available for dairy
producers to evaluate their DMC options.
The 2018 farm bill removed the MPP prohibition on dairy
June 17, 2019
DMC enrol ment wil begin with coverage
producers participating in both the margin program and the
retroactive to January 1, 2019.
Livestock Gross Margin-Dairy (LGM-D) insurance
Summer 2019
Milk Donation Program final rule expected.
program, which also insures the margin between feed costs
and a designated milk price. In addition, producers who
Source: USDA, as of April 12, 2019.
were excluded from participating in MPP in 2018 because
Participation in DMC and any associated payments are
their milk production was enrolled in LGM-D may
retroactive to January 1, 2019. Dairy producers who decide
retroactively participate in MPP.
to enroll in the DMC in June 2019 will have at least four
Other Dairy Provisions
months of margin data available for their consideration. The
The 2018 farm bill reauthorizes the Dairy Forward Pricing
announced national average margins for January and
Program (DFPP), the Dairy Indemnity Program (DIP), and
February 2019 were $7.99 and $8.22, respectively. Thus,
the Dairy Promotion and Research Program (DPRP, or
dairy producers who buy a $9.50 margin for their milk
checkoff) through FY2023. The DFPP allows dairy
production would receive payments of $1.51/cwt for one-
producers and milk handlers/processors to negotiate
twelfth of their covered milk production for January and
contracts for milk delivery, excluding milk for fluid
$1.28/cwt for one-twelfth of production for February. The
consumption. The DIP makes payments to dairy producers
USDA decision tool currently (as of April 18, 2019)
who have to dispose of raw milk because of chemical,
indicates that the milk margin is expected to be below $9.50
radiation, or pesticide contamination. DPRP allows for
through July 2019, resulting in margin payments ranging
industry-funded generic promotion of dairy products,
from $0.21/cwt to $0.81/per cwt through July. During the
research, and nutrition education.
last five months of 2019, the margin is expected to rise
above the maximum DMC margin. This would result in no
The 2018 farm bill repeals the Dairy Product Donation
margin payments.
Program from the 2014 farm bill and establishes a Milk
Donation Program designed to simplify and reimburse costs
Using the known January and February 2019 margins, dairy
of donations of fluid milk that producers, processors, and
producers are assured that if they buy the $9.50 margin
cooperatives make to food banks and feeding organizations.
guarantee at $0.15 per cwt, for their first 5 million pounds
The donation program received mandatory funding of $9
of milk they will recoup at least their premium payment,
million for FY2019 and $5 million annually for FY2020-
plus the $100 administrative fee. For example, a dairy
FY2023.
producer who guarantees a $9.50 margin on 95% of 5
million pounds of production would net the producer about
The farm bill amends the formula for calculating the Class I
$3,820 for the two months ($11,043 margin minus $7,125
skim milk price under Federal Milk Marketing Orders.
Instead of using either the “higher of” the Class III (cheese)
premium and $100 fee).
or Class IV (butter/powder) price to calculate the Class I
Cost of DMC
skim milk price, the average of the two prices—plus a
According to the Congressional Budget Office’s January
$0.74 adjustment—is used.
2019 baseline, net expenditures on DMC and milk
donations are projected to decline from $184 million in
Lastly, the farm bill requires USDA to conduct studies on
2019 to $103 million in 2023. Net expenditures in 2029 are
whether the national feed ration cost is representative of
projected at $98 million. Actual DMC costs will depend on
actual feed costs used in the margin calculation under DMC
participation rates and the national average margin.
and on the cost of corn silage versus the feed cost of corn. It
directs USDA to report high-quality alfalfa hay prices in the
Joel L. Greene, Analyst in Agricultural Policy
top five milk-producing states.
IF11188
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2018 Farm Bill Primer: Dairy Programs

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