The new Farm Bill called the Farm Security and Rural Investment Act of 2002 has a number of provisions for dairy farms in Indiana. Provisions of the bill extend the dairy price support program, establish a new national Johne’s disease control program, increase funding for dairy producers under the Environmental Quality Incentives Program (EQUIP), extend the Dairy Export Incentives Program, improve the statutory mandatory inventory and price reporting language to help prevent reporting errors to USDA, and extend the fluid milk promotion program. Clearly the largest and most apparent change to producers is the establishment of the dairy market loss payment (DMLP) program. It is that program we will look at in some detail.
Dairy producers that produced or will produce and market milk in the US between December 1, 2001 and September 30, 2005 are eligible for the program. Some refer to the DMLP program as a counter-cyclical program, which simply means that as the milk price goes down the payment price goes up. In many ways the DMLP resembles the former Northeast Dairy Compact, except that Uncle Sam will pick up the tab instead of the milk handler. Anytime the announced Boston, MA class I milk price drops below $16.94, all eligible producers will be paid 45% of the difference between $16.94 and the announced price. So far in 2002, there would be a payment for each month. For example, for July 2002, the Class I price was announced in June at $10.62. Because of the $3.25 location differential for MA, the Boston Class I price was $13.87. Therefore, the DMLP payment for July 2002 would be equal to ($16.94 - $13.87) x 45% = $1.3815. The dairy producer would be paid $1.38 for every cwt of eligible milk produced in July 2002.
Requirements for eligibility
Eligible milk will be the first 2.4 million lbs. produced at a single dairy farm during the year. For a dairy with 1000 cows each producing 80 lbs. per day, 2.4 million lbs. is about 1 month of production. On the other hand, for 95 cows each producing 70 lbs. per day the production represents a whole year. For each year, producers will be asked to designate the month they would like payments to begin. The government begins its fiscal year on October 1 and ends it on September 30. October 1 will be considered the starting date for payments and for counting eligible milk each year unless the dairy producer specifies a different month.
For example, if Producer A ships 100,000 pounds per month and does not specify a different starting month. His milk would be eligible for payment in every month that Boston Class I price is below $16.94, because he produces less than 2.4 million lbs. in the entire year. If Producer B ships 500,000 lbs. of milk each month, she may chose to begin the calendar year in January if she thinks prices will be lower and therefore payments will be higher. If the Boston Class I price is less than $16.94 each month, Producer B would have 500,000 lbs. of eligible milk in January, February, March, and April. Only 400,000lbs would be eligible in May and none after that, because only the first 2.4 million pounds is eligible each year. Of course the payment price will be different each month, depending on what happens to the market prices. Production in months when the Boston Class I price is at or above $16.94 will not count toward the maximum 2.4 million pounds of eligible production.
To be eligible, producers must sign a contract with the Commodity Credit Corporation and file it with their county FSA office. Only 1 contract per dairy operation is required and all partners in the dairy may be identified along with the share of payment they will receive for the dairy operation. Current dairy producers will want to sign up for the program by September 30 to receive transition payments as soon as possible. They should bring along evidence of monthly milk production, which could be payment stubs, tank records, milk handler records, or daily milk marketings. According to the Farm Bill, producers will be required to self-certify compliance with highly erodible land conservation and wetland conservation practices by completing Form AD-1026.
Which months do I choose?
A key question that dairy producers will need to keep in mind is which month to begin payments each year. If the month is not specified it will be assumed to be October. But the month can be changed any time before the first day of the month that was previously listed. That is, if a large producer had originally selected February and then noticed that the milk price was going to be lower in March, they would have until February 28 to contact the county FSA to change the start month to March. Dairy operations producing 200,000 lbs. or less per month will want payments to begin in October of each fiscal year, because all of their milk will be eligible.
For dairy farms that produce more than 200,000 lbs. of milk per month, some planning will be needed. The selection of the starting month each year will depend on the level of production each month and the producer’s expectation of milk prices.
One can get some indication of what milk prices are expected to do by looking at the Class III Futures Prices on the Chicago Mercantile Exchange. Closing prices on August 29, 2002 were October 2002 - $10.33, December 2002 - $10.77, February 2003 - $11.41, April 2003 – $11.55, and June 2003 - $11.85. Thus the markets are expecting a gradual increase in the Class III or cheese prices, which in turn are the basis for the Class I (fluid milk) prices on which the DMLP price is based. As such, it appears that most producers would want to keep October as the starting month for the 2003 fiscal year (October 1, 2002 to September 30, 2003).
Keep in mind however that the markets can change. If one believes that the DMLP will encourage more production the market prices could decline in the future. However, the milk to feed price ratio, a measure of the returns relative to feed costs, is the lowest it has been in the past 5 years, and that could lead to decreased national milk production which could boost prices. The market’s best indicators suggest a modest recovery in milk prices going into the first half of 2003.
In most years, milk prices tend to be lowest in summer. In fact, for the period from 1996 to 2002, milk prices were lowest on average in April, May, June, and July, and highest in October and November (Figure 1). It appears that in most years, larger producers would want to select a starting month that allows them to have eligible production in April through August. Keep in mind that the starting month could be moved up if it appears that milk prices will be lower earlier in the fiscal year. For example, assume Dairy C produces 600,000 pounds of milk per month. They may select April as the starting month so they would be eligible for payments in April, May, June, and July. For dairy operations that produce more than 2.4 million pounds per year, it is not only a matter of selecting which months will return a payment, but which months will return the maximum payment.
It will take time to learn how to best utilize the DMLP, but it does offer producers more of a safety net than the dairy support price alone. There are some good web sites to assist producers with evaluations. One useful site is http://www.aae.wisc.edu/future/default.htm.
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