WASHINGTON, May 4, 2016 - The Margin Protection Program (MPP), the primary safety net for dairy farmers, isn’t working out as well as expected, and efforts are already under way to make changes for the next farm bill, according to lawmakers and industry officials.
The biggest problem is that farmers aren’t signing up for the program in record numbers. Why? They say they just don’t get much in return for the fees they have to pay. Dairy farmers paid $73 million in fees last year, but USDA paid out only about $750,000, according to industry officials.
So Minnesota Democrat Collin Peterson, the ranking member of the House Agriculture Committee and one of the four primary architects of the 2014 farm bill, is in talks with the dairy industry to come up with changes.
“I screwed up,” Peterson admitted in a recent discussion with reporters.
MPP has not been a complete failure, though, he stressed, expressing frustration that more producers don’t understand that the primary goal of the program was to offer protection in the worst of times, not to just pay out money to producers.
“The purpose of this program is to provide a safety net,” he said. “A lot of my constituents … they come up to me and say, ‘Well, I didn’t buy it because I’m not going to get anything out of it.’ That’s the wrong mentality.”
In fact, had the dairy program been in place from 2009 through 2014 when the dairy industry suffered low prices and high feed costs, the producers would have received more than $1 billion in payments, a USDA official said.
Still, Peterson admitted, MPP turned out to be not nearly as attractive as it needs to be. Much of the problem, he said, has to do with the calculations built into the program to determine the average feed costs a producer pays and his or her production margins.
Essentially, USDA’s Farm Service Agency calculates margin levels by subtracting the national average feed cost from the average milk price. At the program’s lowest and cheapest level of protection, farmers get paid if margins drop below $4 per hundredweight, but for higher fees producers can get payments when margins drop below $8 per hundredweight.
Where the program is weaker than planners hoped for is the calculation for the average feed costs. Lawmakers had to trim about 10 percent from the value on feed costs in the calculations due to budget restraints, making margins seem better than they really were, industry officials said. And it meant fewer farmers qualify for payments.
Last year 24,748 dairy producers signed up for the MPP, but only 261 opted to get the highest level of protection that paid out with $8 margins. And it was only those 261 farmers that received any payments for four of the six payout periods, FSA data show. No farmers received payments in 2014 and there haven’t been any payouts so far this year.
Peterson said that when the MPP was being devised for the 2014 farm bill, he had hoped the “sweet spot” for the best level of coverage to pay off for producers would be at the $6.50 level.
But FSA data show that 6,457 farmers paid for $6.50-level policies, and none have received any payments. Had margins indeed dropped to the $6.50 level at any point last year – or had the program calculated the margins differently to push up the payout level – thousands more farmers could have received payments.
While dairy farmers don’t want to see their margins drop, they are still in a difficult position because they are feeling pain now from low milk prices and not seeing any benefit from the farm bill’s safety net, an industry official said.
“So the $6.50 was wrong, I think,” Peterson said. “I’ve met with the National Milk Producers Federation and some other groups. We’re looking at $8 as the ‘sweet spot’ and raising the guarantee from $4 to $5. So you’d have a system that would be more in line with what is needed. Whether farmers would buy in or not – it’s going to take a bad year to finally convince them that this is a good idea.”
There are different calculations that could be changed on everything from feed costs to the fees that farmers pay, industry officials said, but discussions are still in a very early phase and it’s almost impossible now to pinpoint exactly what needs to be altered. And that includes the USDA agency in charge of running the MPP.
Peterson said he is taking a serious look at moving the program from FSA to the Risk Management Agency (RMA), which has jurisdiction over all of the traditional crop insurance policies.
Peterson said he originally rejected the idea of giving the dairy support program to RMA for several reasons, including the possibility that there might not be enough insurance agents in the largest dairy-producing regions.
“But that has locked us into a bad situation now because we can’t fix it (MPP) until the next farm bill,” he said. “If this was in RMA, they could address (changes) in one year.” Lawmakers are hoping to produce the next farm bill in 2018.
Dairy industry officials said they are unsure about Peterson’s idea of switching the program to RMA’s control, saying it’s way too early to make that call.
Peterson said that no decisions have been made, but stressed that he believed one thing is certain about MPP: “Clearly it’s not adequate right now.”
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