Agricultural Act of 2014: Summary of Key Provisions – Dairy

Moving away from decades-old dairy programs predicated on government purchases of dairy products to counter downturns ,the Agricultural Act of 2014 moves the dairy sector towards a paradigm that moves toward one that has market signals in it to deal with overproduction.

The cornerstone of the new dairy provisions is the establishment of a margin protection program.

Not later than September 1, 2014, the Secretary of Agriculture is to establish and administer a margin protection program for dairy producers under which participating dairy operations are paid a margin protection payment when actual dairy production margins are less than the threshold levels for a margin protection payment.

The United States Department of Agriculture (USDA) will determine the production history of each dairy operation based on its highest annual milk production in the 2011, 2012 or 2013 calendar years, which will be increased by the U.S. average production growth rate in subsequent years.

A dairy operation that has been in operation for less than a year will have the option of determining production history using one of the following methods:

  • The volume of the actual milk marketings for the months the dairy has been in operation, extrapolated to a yearly amount.
  • An estimate of the actual milk marketings of the dairy based on the herd size of the operation relative to the national rolling herd average data published by the USDA.

If a participating dairy operation is operated by more than one dairy producer, all of the dairy producers of the operation will be treated as a single dairy operation.  If a producer operates two or more dairy operation, each operation will be required to register separately in order to participate in the margin insurance protection program.

Margin Calculations

The margin between the average cost of feed, based on soy meal, corn and alfalfa hay prices, and the national average all-milk price will be insurable.  The average feed cost means the cost of feed used by a dairy operation to produce a hundredweight of milk using the sum of the following multipliers:

Feed Stock                              Multiplier

Corn (per bushel)                    1.0728

Soybean Meal (per ton)          0.00735

Alfalfa Hay (per ton)               0.0137

The calculation of the national average feed cost for corn and alfalfa hay will be based upon the monthly Agricultural Prices report.  The calculation of the national average feed cost for soybean meal will be tied to the monthly central Illinois price, as reported in the Market News – Monthly Soybean Meal Price Report issued by the USDA.

The term “all milk price” means the average price received, per hundredweight of milk, by dairy operations for all milk sold to plants and dealers in the United States.

The calculation of the actual dairy margin will be based upon each consecutive 2 month period by subtracting the average feed cost for that consecutive 2-month period from the all-milk price for that consecutive 2-month period.

Margin Insurance Premium Structures

The annual producer premiums per hundredweight for the first 4 million pounds of production included in the production history of a participating dairy operation are as follows:

Coverage Level           Premium per Hundredweight

$4.00                           None

$4.50                           $0.010

$5.00                           $0.025

$5.50                           $0.040

$6.00                           $0.055

$6.50                           $0.090

$7.00                           $0.217

$7.50                           $0.300

$8.00                           $0.475

The premium per hundredweight for each coverage level specified in the above table (except the $8.00 coverage level) is to be reduced by 25 percent for each of calendar years 2014 and 2015.

The annual producer premiums per hundredweight in excess of 4 million pounds of production included in the production history of a participating dairy operation are as follows:

Coverage Level           Premium per Hundredweight

$4.00                           None

$4.50                           $0.020

$5.00                           $0.040

$5.50                           $0.100

$6.00                           $0.155

$6.50                           $0.290

$7.00                           $0.830

$7.50                           $1.060

$8.00                           $1.360

The premium scale was designed to favor farms with fewer than 200 cows without imposing penalties on larger-scale operations that produce most of the milk in the United States.

Under the new program, dairy producers who choose to expand beyond average U.S. growth will not be able to protect the additional milk production.  There is, however, no significant penalty built into the program except the potentially lower market price for the additional milk sales.

Other Provisions

In addition to the margin insurance program, the new farm bill ends the Dairy Product Price Support and the Milk Income Loss Contract programs, establishes a system by which the USDA will buy packaged dairy products during low-margin periods.

The dairy check off, dairy forward pricing and the Dairy Indemnity Program – which pays dairy producers forced to destroy milk contaminated with pesticides through no fault of their own – are all extended through December 31, 2018.

Copyright © 2014 RDL & Associates, LLC.  All rights reserved.

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