A while back, one dairy industry leader asked me “Could we not have two tiers of margin insurance – one very subsidized and coupled with the stabilization program, and another that is not linked to the supply management, but not nearly as subsidized?” Another comment I received last week after my blog post on lessons from crop insurance for dairy programs was why one of the lessons would not be that insurance and supply controls should not be linked.
I found both questions very intriguing, and decided to modify at the last moment my slides for the 4-State Dairy Nutrition and Management Conference, held earlier this week in Dubuque, IA. I pursued the analysis from a vantage point of Farm bill Title I vs Title XI. “Title I – Commodities” deals with measures with substantial government involvement, such as price floors (marketing loans), sugar and dairy programs. Although we like to think of Dairy Producer Margin Protection Program as an insurance program, insurance programs are really subject of Title XI – Crop Insurance. As I wrote in my earlier blog, DPMPP is in fact a hybrid between a crop insurance and a countercyclical income support instrument, because it is designed to have implied pro-cyclical subsidies. LGM-Dairy, on the other hand, is located in Title XI, and like other programs in that title, it ties the insurable revenue to expected market conditions.
As it currently stands, LGM-Dairy is of very limited use to dairy producers. While it has several important problems that should be addressed, likely the biggest obstacle is its intermittent availability. LGM-Dairy was continuously offered every month from Aug 2008 through Mar 2011. At that point, a combination of successful educational efforts and heavy subsidies have depleted the funds RMA had available for this pilot program. LGM was next offered in October and November 2011, and the only reason it was offered in November is that the RMA’s server crashed after 50 minutes of sales in October, so some subsidy money could not be spent at the first offer event in 2011/12 fiscal year. After 11/2011, LGM was not available until 10/2012. My research with John Newton, Cam Thraen and Brian Gould has identified what kind of policy profiles would work well to substantially reduce margin risk, but our recommendations require a program that is offered continuously, not once in a blue moon.
Based on many years of discussions, the dairy subtitle of the 2013 Farm Bill has been revamped and the new dairy policy passed in the Senate last week and the House Agriculture Committee a few weeks ago is based on two intricately linked pillars – Dairy Producer Margin Protection Program, and the Dairy Market Stabilization Program. At this point in time, it would be wise to either reform LGM-Dairy to make it a viable third pillar of the new federal dairy policy, or discontinue it completely. As it currently stands, LGM-Dairy is not fiscally feasible as a serious policy option. However, one way to make it more budget-friendly could be for RMA to limit government financial support to re-insurance of privately offered (and fully paid for by users) LGM-Dairy contracts. If that is what it would take for LGM-Dairy not to break the bank, federal government could consider very low, or even zero subsidy for premiums and A&O costs. But the bottom line is this: federal agricultural policy has enough Ghosts of Farm Bills Past to begin with – let us either make LGM-Dairy work as the third dairy policy pillar, or let us be done with it.
Bozic, M. 2013. “Dairy Programs in the 2013 Farm Bill: LGM-Dairy-The Forgotten Third Pillar”, presentation delivered at the 4-State Dairy Nutrition and Management Conference, Dubuque, IA, June 13.