Don’t Let the Tail Wag the Dog

by Jim Mulhern, President, CEO National Milk Producers Federation

If experience is the best teacher, Congress should have learned an important lesson from the experience with the dairy Margin Protection Program during the past two years: letting policy be dictated by an inaccurate Congressional Budget Office computer model that attempts to predict costs of a proposed program 10 years into the future is a recipe for failure.

That’s exactly the place we find ourselves in as discussions begin on the 2018 farm bill. A reliance on CBO budget projections that were wrong right out of the gate – they missed the mark in both the first two full years of the program – has resulted in a program in need of improvement to become the safety net it was envisioned to be.

The good news is that National Milk’s members have developed a carefully-calibrated series of changes that will patch the holes in this new federal safety net, restoring it to its original form, so that it will have value to farmers.

The dwindling participation between 2015 and 2017 in the MPP’s supplemental coverage option paints a clear picture of the current shortcoming. Farmers’ use of the MPP – which enables them to insure the margin between milk prices and feed costs, paying premiums for increasing levels of coverage – has declined because the program underestimates their true feed costs.

In 2015, the MPP’s first full year, 56% of dairy farmers elected to pay premiums to purchase coverage above the bare-bones $4 margin level.  But even with the higher coverage levels selected by many farmers, who paid $73 million in premiums that year, MPP issued only miniscule payouts, amounting to less than $1 million.  This was despite the fact that actual margins were tight in 2015.  The program’s enrollees experienced a similar frustration last year, again paying millions more in premiums than the program returned to participants, even though just 23% purchased supplemental coverage.

This year, only 8% of the farms, producing just 2% of the milk supply, are paying premiums for enhanced coverage.

The takeaway from this situation is that there is a profound mismatch between farmer needs and expectations, and the usefulness of the Margin Protection Program.  And because much of the structure of the MPP is written into the 2014 Farm Bill, it will take congressional action to rectify the program’s shortcomings.

The MPP’s limitations are an issue affecting the entire dairy sector, not just the farmers using the program.  Without an effective safety net to better manage risk, both milk production and milk prices are likely to be as volatile as they’ve been for the past 15 years.  This unpredictability becomes a challenge for the entire value chain: cooperatives, processors, retailers and ultimately, consumers.

NMPF has engaged in a top-to-bottom review of the MPP during the past six months, culminating in March with a decision by the NMPF Board to recommend changes in four key areas that will revitalize the MPP. These include:

• Restoring the original feed cost formula first proposed by NMPF.  The feed formula assigns a value to corn, soybean meal and alfalfa hay in order to capture the national average cost of feeding dairy cattle.  But that formula was cut by 10% due to the erroneous budget forecast by CBO. This decision has resulted in USDA-reported margins that are almost $1 per hundredweight higher than they would be under the original blueprint.  I told the House Agriculture Committee at a hearing last month the proposal was right the first time, and the MPP should revert to the original feed formula. We’re also asking that Congress work with the USDA to evaluate the pricing data used for corn, soybean meal, hay, and the all-milk price – all of which should be refined to more closely match the margin conditions experienced across the country.
• Improving the affordability of the program’s premiums.  The cost of premiums should be adjusted to incentivize increased farmer participation in the program, but this must be done in such a fashion that overall MPP budget costs remain reasonable. To be an effective safety net the program needs to enable more robust participation than the current 8% of farms opting for supplemental coverage.  This is not an encouraging participation level for a program of this importance.
• Making payments and annual enrollment more farmer-friendly. Currently the program calculates margins every other month, rather than monthly.  This is a small change that would also boost participation.  Likewise, rather than closing the annual enrollment window in the summer, farmers should have until the end of the year prior to the coming calendar year in which to make enrollment decisions. This another small convenience that enhances the ability of farmers to use the MPP properly.
• Expanding the use of the Livestock Gross Margin Program with the MPP.  Under current law, dairy farmers must choose either the MPP, or the Livestock Gross Margin (LGM) program to manage their risks – even though the programs are complementary, not duplicative.  The LGM works well for some farmers, and modest improvements to it, along with changes to the MPP, would greatly expand the risk management safety net available to dairy producers.

Taken together, these proposals will have a modest budget impact – indeed, how could they not, when right now more revenue is flowing to the government from farmers’ premiums than the MPP is returning to enrollees?  Fortunately, the leaders of the House Agriculture Committee have acknowledged that the farm bill priority of Congress should be to first develop the proper policy, and then allocate resources to properly implement that policy.

Right now, instead, the budget tail is wagging the dog, which is the wrong way to formulate a viable dairy program, and not what farmers need and deserve. By applying these lessons learned, Congress can fix the MPP in the upcoming farm bill and we will have a viable, and effective, dairy safety net for the future.