What's in store for the Margin Protection Program (MPP) for dairy with passage of a new farm bill

By Scott Brown, dairy economist, University of Missouri

With passage of the 2014 farm bill, congressional leaders made a major change in the federal policy support mechanism for dairy farmers. Out were decades of policies that focused on supporting dairy product prices and in was a new era of an insurance-type product that is meant to help dairy farmers withstand low milk price less feed cost margins, as well as provide flexibility in choosing the level of protection they need.

A policy change of this magnitude is difficult to make and can lead to a safety net that is either too strong or weak. The experience thus far with the Margin Protection Program (MPP) has left many farmers feeling it is an inadequate safety net program.

Two issues have caused many dairy farmers to determine that MPP is not working. First, the baseline government spending levels available to construct a dairy safety net are small relative to the size of the industry. In June, the Congressional Budget Office estimated that the current MPP program would spend $839 million over the next 10 years. This is less than 0.2 percent of the level of U.S. dairy cash receipts projected over the same period. It remains incredibly difficult to create an adequate safety net with such a small percentage of government support relative to market cash receipts.

Equally important to the policy discussion is the continued changing supply structure of the U.S. dairy industry. In 2012, 1,730 dairy farms had 1,000 or more dairy cows and supplied 50 percent of U.S. milk supplies. In 2004, there were only 1,310 dairy farms with 1,000 or more dairy cows and they supplied 33 percent of milk supplies. The trend toward larger dairy farms that produce a larger proportion of milk supplies complicates the choice of an adequate dairy safety net. If the safety net is too strong, it potentially results in billions of dollars of outlays, while too weak a safety net results in farmers paying premiums without payments occurring or reducing their level of participation and missing payments when they occur.

The one message that has been consistently voiced by those with an interest in dairy policy is that changes to the MPP program would help turn the program into a stronger safety net. The proposed changes include, but are not limited to, lowering premiums, increasing the quantity of milk that qualifies for the lower MPP premiums, changing how the MPP margin is calculated and moving to a monthly payment scheme. These potential changes would likely result in the MPP being more effective than the program passed in the 2014 farm bill. Yet, all of these changes would also likely increase the projected federal cost of the program.

The same challenge remains that the MPP has faced since its inception. It is difficult to fit the MPP within the constraints of the federal outlays baseline yet provide dairy farmers with an adequate safety net. The proposed changes to the MPP being discussed in the 2018 farm bill debate should increase the level of the dairy farmer safety net, but only time will tell if it will provide the level of support that farmers need.

Scott is an assistant extension professor in the Department of Agricultural and Applied Economics at the University of Missouri and the state extension agricultural economist for University of Missouri extension. He has worked with U.S. Congress over the past two decades in determining the quantitative effects of changes in dairy and livestock policies and has testified regarding dairy and livestock policy issues before House and Senate Agriculture committees. Scott can be reached at (573) 882–3861.