With an extended string of high milk prices, many farmers have other things on their minds than managing the margins. We all know that milk prices are cyclical and things can change fast. Andrew Novakovic, a professor of Agricultural Economics at Cornell University, recently provided Cooperative Extension and industry professionals with an overview of the new Margin Protection Program “MMP.” Since the 1930s, there has been diary pricing support and the MPP program is the newest in a string of price protection programs. Changes in production have made older programs beneficial to some smaller farms and for the most part irrelevant to larger operations. The current system is overwhelmed and allows for years like 2009 when a perfect storm of extremely low demand and high costs create financial destruction. The government is essentially being forced to act to develop programs that support the market as a whole. While some of the older programs were politically motivated, current programs are being based more on industry need. Professor Novakovic suggests that a good support program provides certainty that farmers will be paid, stability that takes wide fluctuations out of the market and adequacy by allowing farms to make money as a business. In an attempt to meet these needs, the MPP program is a type of hybrid mix of insurance and direct payments.
Farmers have several options for risk management; and they have to choose carefully what program or bundle of products, contracts, or hedging options they should use. One of the key factors in making the decision should be understanding what your income over your feed costs are and your costs of producing each cwt on your farm. It is impossible to make a good choice if you don’t know how much money you need to make milk. Luckily, there are instruments, like Cornell’s Dairy Farm Summary, and Pro-Dairy’s Diary Profit Monitor that can help you determine your cost of production. You can also call your local extension office for help. The goal of these programs is not to game the system and make more money, but to protect yourself from losses. The other less attractive option to risk management is to wait and see what happens.
The new milk margin program will be in place soon. Cooperative Extension offices will be hosting several informational meetings over the next few months to educate producers on the program.
Feel free to contact Kirk Shoen at kjs264@cornell.edu.
