DMPP vs. Livestock Gross Margin Program

This is the final post in a series of four that address the Dairy Margin Protection Program (DMPP). Visit the following posts to read about the highlights for dairy producers in the Farm Bill, the details of the DMPP and to see an example of how DMPP will assist producers.

The Livestock Gross Margin program for dairy still will be available under the 2014 Farm Bill and, like most Title XI programs, is unchanged in its basic provisions. Producers who choose DMPP must forego LGM coverage, while producers who choose LGM must forego DMPP coverage – they cannot have both coverages in place at the same time.

The table below contains a side-by-side comparison of the major features of both programs. One major difference between the two programs concerns the prices used to set the coverage. The DMPP uses monthly average USDA NASS and AMS values, while LGM utilizes CME futures prices with a state-level basis adjustment for the milk price, and a more customized ration formula (converted to corn and soymeal equivalents). Therefore, one can view the LGM coverage prices as more customized to the producer’s particular situation.

Also, the par coverage level on LGM is based on projected monthly margins implied by the futures prices rather than an arbitrary level (as with DMPP). The premiums on LGM will adjust based on projected market conditions (using the option implied volatilities to measure risk). Another feature of LGM is that the annual production plan is adjusted to accommodate any expansion of the dairy herd, while the DMPP treats the herd size as fixed through 2018, with the only expansion related to the increase in U.S. milk production.

Related to using the NASS and AMS values in DMPP as a hedge to AgriBank District milk and feed prices, the coverage still should match very well to most situations. From January 1995 to December 2013, the AgriBank average all-milk price has a rank-order correlation of 99.4 percent with the NASS national average price. For individual states in the District that report monthly milk prices, the correlations range from a low of 96.9 percent to a high of 98.9 percent. The AgriBank District has an average “basis” relative to the national NASS milk price of $0.63 per cwt premium. For corn, the AgriBank District has an average correlation of 99.8 percent with the national NASS average price, with state ranges from a low of 98.8 percent to a high of 99.8 percent. The AgriBank District has an average basis relative to the national NASS corn price equal to an average premium of 0.58 cents per bushel.

Feature	Dairy Margin Protection Program (DMPP)	Dairy Livestock Gross Margin Insurance (LGM)
Administered & Offered By	USDA Farm Service Agency (FSA)	USDA Risk Management Agency (RMA) through participating private crop insurance providers.
Producer Limits	Payment - no payment limitations or eligibility constraints since under Dairy Title of Farm Bill. Production - between 25 and 90 percent of producer's Actual Dairy Production History (ADPH) per year.	Payment - no limits since under Crop Insurance Title of Farm Bill. Production - no minimum. Maximum - 24 million pounds per marketing year.
Coverage Time Periods	Calendar year with indemnities calculated in six consecutive two-month time buckets per year (Jan-Feb, Mar-Apr, May-June, Jul-Aug, Sep-Oct, and Nov-Dec) with 1/6 of producer's annual coverage allocated to each bucket.	Signup each month on last Friday of month. Coverage starts one month following signup for 11 consecutive months. Coverage allocated into monthly buckets based upon producer's target marketing and feed plans filed with insurance provider.
Prices Used	USDA National Agricultural Statistics Service (NASS) all-milk, corn and alfalfa hay prices. USDA Agricultural Marketing Service (AMS) Central Illinois soybean meal price. All prices reported as monthly averages. No basis adjustments on prices.	CME Class III milk futures price with state-level basis adjustment for milk price. CME corn and soybean meal futures prices for feed cost. For non-delivery months (corn and soymeal), use weighted average of surrounding delivery months. For expected prices, use average for three days prior to signup deadline date. For settlement, use three days prior to expiration.
Feed Cost Formula	Use standard ration formula using corn, soybean meal, and alfalfa hay priced using USDA NASS and AMS values.	Producer submits ration in target feed plan. Standard table used to convert ration into corn and soybean meal equivalents which are priced using CME corn and soybean meal futures.
Coverage Levels & Premiums	Coverage offered for margins between $4.00 and $8.00 in $0.50 per cwt increments. Premium schedule fixed in legislation through 2018 (see Table 1). Coverage level is same for each two-month time bucket during calendar year. Producer can change coverage level each year.	Par coverage is set at expected margins for each of the 11 consecutive months using expected prices just prior to signup. Producer can select deductibles ranging for $0 to $2 per cwt in $0.10 per cwt increments. Premium continuously adjusted based upon market-based actuarial formula that takes into account deductible level.
Production Levels	For dairy producer, the Actual Dairy Production History (ADPH) level is equal to the highest annual production in either 2011, 2012 or 2013. For new producers, ADPH is established either by extrapolating monthly production to annual or by multiplying herd size by national average production per cow. ADPH adjusted annually by applying national milk production percentage growth to previous year's ADPH. Producer can insure between 25% to 90% (in 5% intervals each year).	Producer can choose between 0% and 100% of maximum approved target marketings in each month. Approved target marketings are certified by the producer and are equal to the lesser of the capacity of the dairy operation over the 11-month insurance period (as determined by insurance provider) and the underwriting capacity limit as stated in the special provisions. Actual revenue based upon actual milk marketings during coverage month although feed ration amounts stay the same as in the target feeding plan for determining actual margin.

Summary

The DMPP represents a major policy change in the 2014 Farm Bill and will prove to be a valuable risk management tool for AgriBank District dairy producers. According to additional AgriBank analysis, the program historically would have had an average payout that exceeds the premium for most levels of coverage. In the near future, it appears unlikely that the program will provide payments in 2014 but possible it will do so in 2015. For 2016 and beyond, the program should have much higher odds of making payouts, depending on market conditions.

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.