Dairy Margin Protection Program: An Example

This post contains an example of how the Dairy Margin Protection Program (DMPP) can assist a dairy producer. Check out Details of the DMPP and the highlights of the Farm Bill programs for dairy producers.

Suppose a dairy producer wants to enroll his dairy operation into the DMPP for 2015. His established Actual Dairy Production History for the year is 8.144 million pounds based on his 2013 production level of 8.0 million pounds and the 1.8 percent growth in 2014 national milk production. He chooses to enroll at the 55 percent coverage level, with a coverage margin of $6.00 per cwt.

Therefore, his enrolled production is 4,479,200 pounds (8,144,000 x 0.55) or 44,792 cwt. His production subject to the Tier 1 premium is 40,000 cwt and for the Tier 2 premium is 4,792 cwt (44,792 – 40,000). Under the fixed premium schedule in the Title D legislation, the $6.00 coverage level has a Tier 1 premium of 5.5 cents per cwt and Tier 2 has a 15.5 cent premium. However, since it is 2015 and the coverage level is less than $8.00, the Tier 1 premium is discounted by 25 percent and is equal to 4.13 cents per cwt. Therefore, his total premium is as follows:

Tier 1 Total Premium	$1,650.00	= 40,000 CWT x $0.0413 per CWT
+       Tier 2 Total Premium	$742.46	= 4,792 CWT x $0.155 per CWT
+          Administration Fee	$100.00
=                   TOTAL COST	$2,492.76

Assuming that 2015 has the same price (and margin pattern) as 2013 results in the indemnity pattern illustrated in Table 2. Each two-month bucket is allocated 1/6 of the annual 44,792 cwt coverage, or 7,465.33 cwt per bucket. Three of the buckets had margins below the $6.00 coverage level (March-April, May- June, and July-August) for a total gross indemnity of $7,947.56 for the calendar year. Subtracting the total premium and administration cost of $2,492.76 results in a net indemnity of $5,454.80 for the total operation or $0.1218 per cwt of enrolled production.

Coverage Period		Enrolled Prod (CWT)	Coverage	ADPM	Per CWT	Total Indemnity
Jan	Feb	7,465.33	$6.00	$6.01	$0.00	$ -
Mar	Apr	7,465.33	$6.00	$5.61	$0.39	$2,944.45
May	June	7,465.33	$6.00	$5.56	$0.44	$3,250.67
July	Aug	7,465.33	$6.00	$5.77	$0.23	$1,752.44
Sep	Oct	7,465.33	$6.00	$8.91	$0.00	$ -
Nov	Dec	7,465.33	$6.00	$9.98	$0.00	$ -
Total Indemnity						$7,947.56
Total Cost						$2,492.76
Net Total Indemnity						$5,454.80
Net Indemnity per Enrolled CWT						$0.1218

 

Information in this post was provided by AgriBank. AgriBank is FCS Financial’s funding source. It is one of the largest banks within the national Farm Credit System, with more than $80 billion in total assets. Under the Farm Credit System’s cooperative structure, AgriBank is owned by 17 affiliated Farm Credit Associations. The AgriBank District covers America’s Midwest, a 15-state area from Wyoming to Ohio and Minnesota to Arkansas. More than half of the nation’s cropland is located within the AgriBank District, providing the Bank and its Association owners with exceptional expertise in production agriculture. For more information, visit www.AgriBank.com.