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COST-BENEFIT ASSESSMENT

Date: July 18, 2014

Agency: USDA/FSA

Contact: Milton Madison

Dairy and Sweeteners Analysis Group

Economic and Policy Analysis Staff

Farm Service Agency

United States Department of Agriculture

Washington, D.C. 20250

Phone: 202-690-0050

I. TITLE Margin Protection Program – Dairy and Dairy Product Donation Program.

II. EXECUTIVE SUMMARY

Section 1401-10, Title I, of the Agricultural Act of 2014 (Public Law 113-79, the 2014

Farm Bill) directs the Secretary of Agriculture to establish and administer the Margin 

Protection Program-Dairy (MPP-Dairy) for dairy operations that provides catastrophic 

coverage for various “margin” levels, where the dairy production “margin” is defined as 

the difference between the all-milk price and feed cost. Coverage at the $4 per 

hundredweight (cwt) margin level for all participating operations will cost a $100 annual 

administrative fee. There are options for producers to buy higher coverage for margins up 

to $8 per cwt at incremental premium increases. Payments under MPP-Dairy are made to 

participating operations when actual dairy margins are less than the coverage level selected 

by the dairy operation during program sign-up. 

Section 1431 of the 2014 Farm Bill directs the Secretary to establish the Dairy Product 

Donation Program (DPDP) to address low margins for dairy operations by using

Commodity Credit Corporation (CCC) funds to purchase dairy products for public and 

private nonprofit organizations that feed low-income people. Purchases are only made 

during periods of low margins. Both programs are set to expire on December 31, 2018. 

U.S. Department of Agriculture (USDA) projections as of early 2014 indicate that, over 

the upcoming 10-year period, MPP-Dairy payments will be triggered very infrequently and 

DPDP purchases will not be triggered at all. Continued strong export markets are expected 

to support domestic milk prices as production expands. Declining feed costs are expected 

to keep annual average margins above $10 per cwt through 2019 even as milk prices 

decline from recent record highs. Increasing feed prices in the second half of the 

projection period, 2020-2024, bring annual average margins below $10 per cwt, but they

remain above the $8 maximum coverage level for MPP-Dairy through 2024. 
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When fluctuations in feed costs and milk prices around the mean estimates are considered 

in a stochastic model, net cumulative expenditures (after fee and premium costs) through 

2018 for MPP-Dairy and DPDP are projected to be $389 million.

During low margin years for the dairy industry (See Figure 1), program expenditures could

reach $4 to $6 billion if nearly all dairy operations participate and buy coverage at $8 per 

cwt for 90 percent of their milk production. Fee and premium income would be $1.75 

billion (see Table 2).

The CCC is publishing a final rule to implement the new MPP-Dairy and DPDP through 

regulations that would be specified in Title 7, Part 1430 of the Code of Federal Regulations 

(7 CFR Part 1430). This document provides the cost-benefit assessment of the final rule.

Figure 1. MPP-Dairy Margins

Source Data: NASS Quick Stats

II. NEED FOR ACTION

Low margins (the revenue per cwt from milk sales over the cost of feed to produce that 

milk) have consistently concerned producers for many years, and low dairy prices, high 

production costs, and oversupply have been issues as recently as 2013. To address these 

concerns, MPP-Dairy and DPDP focus on directly supporting producer margins, rather 

than indirectly supporting producer profitability by supporting prices for dairy products 

(i.e. nonfat dried milk, cheese, butter) or incomes. MPP-Dairy was established, in part, 

based on recommendations from the 17-member Dairy Industry Advisory Committee 

$ per cwt
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established by the Secretary of Agriculture in 2009. The committee provided advice on 

ways to improve dairy farm profitability and reduce milk price volatility.

Both MPP-Dairy and DPDP are funded through the CCC. There is no limit on how much 

may be spent under either program to support dairy producer operations and provide dairy

products to low income individuals.

MPP-Dairy and DPDP were developed by Congress to replace and improve the Milk 

Income Loss Contract Program (MILC), the Dairy Product Price Support Program 

(DPPSP), and the Dairy Export Incentive Program (DEIP), previous safety net programs 

for dairy farmers. MPP-Dairy compensates producers when the difference between milk 

prices and feed prices fall below a certain level. Production coverage is not as limited as 

under MILC and can now be protected at the $4 per cwt margin level for a small fixed fee. 

Greater protection is available at higher premium rates, which allows more protection for 

large dairy operations. In addition, producers pay a lower premium for margin protection 

on the first 4 million pounds (equivalent to the production of a 185 cow herd) of milk 

production base covered under MPP-Dairy, which benefits small producers. In contrast, 

MILC limited production eligibility coverage to 2.985 million pounds of milk, equivalent 

to the production of a 140 cow herd, which meant that large operations received MILC 

payments on a very small share of their production. 

DPDP will support dairy product prices when CCC makes purchases of commercially

available packages of dairy products for distribution by public and private nonprofit 

organizations that work to feed low income populations. This program is designed to 

remove dairy products from the commercial market by providing the purchases to 

populations that otherwise have limited access to dairy products. These purchases should 

improve dairy product prices and improve margins for dairy operations while supplying 

low income groups with needed food. Unlike the DPPSP program, which purchased and 

stored bulk dairy products until market prices improved or were reprocessed for donation,

the DPDP is expected to cause less market distortion since products will be purchased but

not be stored by CCC. Savings in reprocessing costs are also expected to be an efficiency

advantage to the government relative to DPPSP.

The DEIP, established to help offset the competitive disadvantage of domestic dairy

products due to European Union subsidies paid to exporters that aided their export sales,

has been inactive for most of the last decade as U.S. dairy products have become more 

competitive in world markets. DEIP was repealed by the 2014 Farm Bill (Section 1423), as 

was the DPPSP (Section 1421).

IV. ADDITIONAL DETAILS ON MPP-DAIRY

MPP-Dairy supports producer margins, not milk prices, and is designed to address both 

catastrophic conditions of low milk prices and/or high feed costs that result in prolonged 

periods of low margins. MPP-Dairy provides margin protection at $4 per cwt for an annual 
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administrative fee of $100. The “margin” is the difference between the price of one 

hundred pounds of milk and the price of the feed needed to produce that milk. For 

example, if the price of milk is $20 a cwt and the cost for soybean meal, corn, and hay

needed to produce that milk is $12 a cwt, the margin is $8 a cwt. For $100, producers will 

be able to protect the margin on 90 percent of their milk production base, which is based on 

their production history. In the first year of MPP-Dairy, a production base will be 

established for the dairy operation at the highest level of annual milk production during 

calendar year 2011, 2012, or 2013. In subsequent years, annual adjustments to the 

producer’s production history will be made based on the national average growth in overall 

U.S. milk production as estimated by USDA. 

As required by the 2014 Farm Bill and specified in the rule, producers will be able to buy

additional “buy up” margin protection coverage in 50-cent increments, for margins 

beginning at $4 margin per cwt through $8 per cwt. There is no premium on the $4 per cwt 

coverage (beyond the $100 administrative fee); however, dairy producers can purchase a 

higher coverage by paying annual premiums, which will guarantee higher margin 

protection coverage.1For these buy-up levels of coverage, producers will also be able to 

protect from 25 percent up to 90 percent (in 5-percent increments) of their production 

history. The price per cwt for the premiums is specified in the 2014 Farm Bill and in the

rule.

USDA will calculate the margin using the all-milk price minus the average feed cost, as 

specified in the 2014 Farm Bill. Payments will be made to producers based on the 

percentage of their production history that they have chosen to protect (25-90 percent) and 

the level of margin coverage they have selected ($4 to $8 per cwt). Payments are made

when margins fall below $4 per cwt (or below the selected level of coverage if a producer 

has selected a margin level above $4 per cwt) for two consecutive statutorily-paired 

months. The MPP-Dairy payment will be calculated by multiplying the difference between 

the coverage level threshold selected by the dairy operation and the average actual dairy

production margin for the applicable 2-month period by the coverage percentage (25-90 

percent of production) selected by the participating dairy operation and multiplying the 

result by the annual production history of the dairy operation divided by 6 (to obtain the 

two-month production history).

Benefits triggered under MPP-Dairy are not subject to average adjusted gross income 

(AGI) limitations that apply to other FSA and CCC programs. Any increase in 

participation in MPP-Dairy for large producers compared to MILC program participation 

due to AGI limits is likely to be offset by reduced participation by small producers 

 

1 For a 700 cow dairy producing 15 million pounds of milk per year, selecting $7 per cwt coverage for 90 

percent of their production base would cost $110,000. Coverage at the $8 per cwt level would cost nearly 

$150,000.
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unwilling to pay the $100 administrative fee. Producers must have milk marketings at the 

time of program sign-up but there is no production limit for eligibility, although premiums 

are higher for production over 4 million pounds per year. In general, all U.S. dairy

producers are eligible to participate in MPP-Dairy; however, producers enrolling in the 

MPP-Dairy cannot receive benefits under the Risk Management Agency (RMA) Livestock 

Gross Margin for Dairy (LGM-Dairy) program. LGM-Dairy is most beneficial when 

margins are falling, but it provides little benefit once margins have reached a low point and 

stabilized. LGM-Dairy has about 500 active policies currently. The largest LGM-Dairy

participation was in 2011, when 1,224 policies were active. By contrast, over 35,000 

operations participated in the MILC program in 2013.

V. ADDITIONAL DETAILS ON DPDP

DPDP is intended to remove dairy products from the commercial market to improve 

margins for milk producers. As specified in the 2014 Farm Bill, the products cannot be 

stored by USDA, but must be immediately distributed to public and private nonprofit 

organizations that provide food to low income individuals. The Secretary is required to 

operate DPDP within 120 days after the MPP-Dairy becomes operational. USDA has 

made the discretionary decision to implement DPDP at the same time as MPP-Dairy. 

Purchases must begin when the milk producer margin, as measured under MPP-Dairy, falls

below $4 per cwt for the 2 prior months. Purchases continue until the margin recovers to 

above $4 per cwt, or for 3 months, whichever is shorter. Purchases terminate after 3 

months even if margins are still below $4 per cwt, but can be activated again after a new 2

prior month period of margins are below $4 per cwt. The purchases also terminate if 

domestic cheddar cheese or nonfat dry milk prices exceed world prices by certain 

percentages specified in the 2014 Farm Bill.

As specified in the 2014 Farm Bill, public and private nonprofit organizations will be 

consulted as to what dairy products they require for their feeding programs. USDA will 

make purchases of required items at market prices using CCC funds. Steps will be taken to 

ensure that the dairy products reach the intended recipients and that offsets of commercial 

sales are minimized using existing USDA Food and Nutrition Service (FNS) procedures 

and regulations. Resale of donated dairy products is prohibited.

FNS regulations in 7 CFR 250.13(d)(1) provide that donated foods “be distributed only to

recipient agencies and individual recipients eligible to receive them” under applicable 

program regulations. FNS regulations in 7 CFR 250.13(a)(1)(ii) provide that donated foods 

“not be sold, exchanged or otherwise disposed of without the approval of the Department.” 

Any losses of donated foods resulting from improper distribution or use will be subject to 

the requirements of 7 CFR part 250 and the instruction and guidance provided in FNS 

Instruction 410-1, Rev 2 “Claims for Losses of Donated Foods and Related Administrative 

Losses—Procedures for the State Distributing Agency,” and in FNS Instruction 420-1, 

“Managing Agency Debts.”
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VI. IMPACTS – COSTS, BENEFITS AND TRANSFERS

Based on the FY 2015 President’s Budget Midsession Review (MSR), gross program 

expenditures (non-stochastic) would average $1.8 million per year for the life of the MPPDairy and DPDP programs. Under this scenario, if the MPP-D in 2015 were to have a 

similar participation rate as MILC in 2013, about 75 percent of the expected 43,000 

licensed dairy operations would participate at the minimum coverage level at $4 per cwt 

and their administrative fees would generate $3.1 million per year. Those administrative 

fees alone would more than offset program costs (see Table 1, 2015 MSR Scenario).

Table 1. Estimated Transfers ($ millions) and Underlying Inputs

When stochastic modeling is used (i.e. variations around milk and feed ingredient price 

means are assumed), higher program expenditures are generated.

2

(See Table 1) Past 

 

2 Variation around the mean all-milk price and feed ingredient prices was calculated for the previous 10 years. This 

variation was then applied, after adjusting for the increase in means to keep the variance and mean values 

Base FY 2015 FY 2016 FY 2017 FY 2018 Total FY 

15-18 

Annual 

Average 

Licensed Dairy Operations 45,082 43,730 42,418 41,145 39,911

Milk Production Base (Billion lbs) 202 207 213 220 224

Scenario Using (2015 MSR)

USDA Gross MPP-D + DPDP Outlays - 2.0 2.0 3.0 7.0 1.8

USDA MPP-D Income 3.3 3.2 3.1 3.0 13 3.1

USDA Net MPP-D + DPDP Expenditures (3) (1) (1) 0 (6) (1.4) 

Stochastic Scenario:

USDA MPP-D Outlays 100 175 175 185 635 159

USDA MPP-D Income 87 91 93 95 366 92

USDA Net MPP-D Expenditures 13 84 82 90 269 67

USDA DPDP Outlays 30 30 30 30 120 30

USDA Net MPP-D + DPDP Expenditures 43 114 112 120 389 97
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fluctuations in milk prices, feed costs and margins can be seen in Figure 1. Under this 

scenario, it is assumed that 75 percent of dairy operations participate in MPP-Dairy, 

similar to the Milk Income Loss Contract Program (MILC) participation rate, and half of 

total dairy operations buy supplemental coverage (that is, above the $4 per hundredweight 

(cwt) margin level) and those buying higher coverage insure half of their eligible milk 

production base. The participation rates were based on discussions with University dairy

specialists from Illinois, Michigan, Minnesota, New York, Ohio and Wisconsin. 

Preliminary survey results released by the University of Minnesota indicate that between 

60 percent and 75 percent of dairy operations may participate in MPP-Dairy and between 

42 percent and 53 percent of total producers may buy coverage above $4 per cwt. The 

2014 Farm Bill repeals the MILC program effective September 1, 2014 or upon 

implementation of the MPP-Dairy program, whichever is earlier. (MPP-Dairy premiums 

for 2014 and 2015 are discounted by 25 percent for the first 4 million pounds of base.) 

Stochastic MPP-Dairy program cost projections range between $100 and $185 million per 

year, while premiums and fees paid by dairy operators range between $87 million and $95 

million over the life of the MPP-Dairy (2015-2018). Net transfers to dairy operations are 

expected to match the average net MPP-Dairy payout of about $67 million per year or

almost $270 million for the four years of the program. Meanwhile, USDA purchases of 

milk products under the DPDP for distribution to low-income food recipients is expected to 

cost an average $30 million per year, with the program expected to trigger once every three 

years, for the time period of the program. Food aid recipient benefits are expected to equal 

the DPDP outlays of $30 million per year or $120 million for the total program. Net 

program expenditures for MPP-D and DPDP range from approximately $43 million to 

$120 million per year or $389 million through 2018.

The expected transfers projected with the non-stochastic approach and shown above were 

calculated using an assumption of conditions used for the 2015 President’s Budget, which

reflects a very attractive margin period for dairy operations. If the program had been in 

effect for a year such as 2012, costs would have been much different (recall Figure 1). In 

that year, feed costs were high and milk prices were low. If no producers had bought 

supplemental coverage, and 75 percent of operations participated in the program at the 

minimum ($4 per cwt) coverage level, expenditures for a year such as 2012 would have 

been $350 million (see Table 2, line 3) and fees paid by dairy operations would have been 

about $4 million. 

Under 2012 conditions, if 25 percent of operations participate in the program at the 

minimum ($4 per cwt) coverage level, and half of the dairy operations bought coverage at 

the $6 per hundredweight level and covered half of their milk production base,

expenditures would have gone up to $790 million in that year, while fees and premiums 

paid by dairy operations would have been about $50 million (see Table 2, line 4). 

 

proportional, to the projected all-milk prices and feed ingredient prices for the MPP-Dairy program period.
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As a worst case scenario, if all operations had signed up for the program at the $8 per cwt 

coverage level in 2012 and covered 90 percent of their milk production base, expenditures 

for that year could have reached $4.6 billion, with about $1.75 billion paid in fees and 

premiums by dairy operations (see Table 2, line 5).

If the program had been in effect during 2009, expenditures would have been even higher,

as can be seen in the Table 2 below in lines 6 through 8.

Table 2 - Examples of MPP-Dairy Expenditures, Fees and Premiums Under Various 

Assumptions, Using Historic Data

Estimated 

MPP-Dairy

cost per year

$ million

Fees and 

Premiums

per year

$ million

Assumptions

1.2015 MSR 1.8 3.1 75% of operations cover at $4 level

2. Stochastic Estimates 100 to 185 87 to 95 25% of operations cover at $4 level, 

50% cover > $4 per cwt on 50% of base 

3. 2012 $4 per cwt 

coverage

350 4 75% of operations cover at$4 level

4. 2012 $6 per cwt 

coverage

790 50 25% of operations cover at $4 level, 

50% cover $6 per cwt on 50% of base 

5. 2012 $8 per cwt 

coverage

4,600 1,750 100% of operations cover $8 per cwt on 90% 

of base production

6. 2009 $4 per cwt 

coverage

565 5 75% of operations cover at $4 level

7. 2009 $6 per cwt 

coverage

1,200 50 25% of operations cover at $4 level, 

50% cover $6 per cwt on 50% of base 

8. 2009 $8 per cwt 

coverage

5,730 1,750 100% of operations cover $8 per cwt on 90% 

of base production

The estimates in line 1 of Table 2 represent the assumptions used in the President’s budget.

The stochastic model is centered on those conditions, but it also includes the variability 

contributed by years such as 2012 and 2009. This added variability results in the higher 

cost estimates seen in Table 2, line 2 compared to Table 2, line 1. 

Nearly all of the impacts estimated in this analysis are transfers between the federal 

government and dairy farmers or from the federal government to low-income individuals. 
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Although these transfers create incentives that very likely change the way society uses its 

resources, we lack data with which to estimate the resulting social costs or benefits.

VII. ALTERNATIVES CONSIDERED AND ASSOCIATED IMPACTS

The primary alternative considered was the timing of producer signup relative to the start 

of the program year. (The start of the program year is the start of the coverage period.) 

Options included holding signup at the beginning of the program year, and either 6 months 

or 3 months in advance of the program year. The first option--choosing coverage while in 

the coverage period--was viewed as akin to allowing a home owner to buy fire insurance 

while the house is on fire, a significant adverse selection issue. This option would allow 

dairy operations to sign-up for maximum coverage when low margins were projected and 

not sign-up at all if projections were for a high margin year. As a result, this option was 

not chosen because it would greatly increase program costs during low margin periods, and 

have an adverse effect on sign up in high-margin years, limiting fee and premium income. 

While the second option—enrolling 6 months in advance of the program year--would allow 

plenty of time for producers to consider coverage levels, unpublished survey results 

obtained from John Newton (University of Illinois) and Mark Stephenson (University of 

Wisconsin) indicate that producers are reluctant to sign up for coverage so far in advance of 

the covered period. If producers are not willing to participate in the program, it will not 

provide the desired safety net. The Newton/Stephenson survey results indicated that 

producers were comfortable with a 90 day advance signup, which would alleviate much of 

the adverse selection problem while not discouraging dairy operations from participating in 

the program. Regardless, expected margins over the 2014-2024 periods—irrespective of 

the signup window—are high enough that payments would be negligible. These issues will 

arise if markets move unexpectedly to a lower margin period. The adverse selection 

problem is discussed in the references at the end of the CBA.

VIII. SUMMARY OF EXPECTED IMPACTS 

Allowing variation in milk prices and feed ingredient costs around their means in a 

stochastic model generates estimates of $100 to $185 million per year in MPP-Dairy

payments to dairy operations, $30 million per year for DPDP purchases, and collection of 

$87 to $95 million per year in fees and premiums paid by dairy operations for program 

participation. For the four-year life of the MPP-Dairy and DPDP programs, cumulative net 

expenditures through 2018 are expected to total $389 million. Cumulative net MPP-Dairy

payments to dairy producers are expected to total almost $270 million, while benefits to 

food aid recipients are expected to be about $30 million per year for a total of $120 million. 

Program payments would be much larger if dairy operations face conditions similar to 2009 

or 2012. In that situation, MPP-Dairy payments could reach as high as $4 to 6 billion per 

year, DPDP costs could be $100 to $200 million, with fees and premiums collected as high 

as $1.75 billion.
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References:

Newton, J., C.S. Thraen, and M. Bozic. 2013a. “Actuarially Fair or Foul? Asymmetric 

Information Problems in Dairy Margin Insurance.” Paper presented at NCC-134 

Conference on Applied Commodity Price Analysis, Forecasting and Market Risk 

Management, St Louis, MO, April 22-23, 2013.

---. 2013b. “Whither Dairy Policy? Evaluating Expected Government Outlays and Distributional 

Impacts of Alternative 2013 Farm Bill Dairy Title Proposals.” Paper presented at AAEA 

Annual Meeting, Washington, D,C, August 4-6, 2013.