On April 10, 2020, the Risk Management Agency (RMA) issued Managers Bulletin: MGR-20-010 and a press release relating the the affect of dumped milk on the Dairy Revenue Protection and Livestock Gross Margin Policies. https://www.rma.usda.gov/en/Policy-and-Procedure/Bulletins-and-Memos/2020/MGR-20-010; https://www.rma.usda.gov/en/News-Room/Press/Press-Releases/2020-News/USDA-Addresses-Milk-Dumping-Authorizes-Other-Flexibilities-To-Help-Producers-Amid-Pandemic. RMA states that both dairy policies require dairy producers to market the amount of milk that is proportionate to the amount of insurance coverage they purchase. RMA states the milk must be sold to count toward milk being delivered to the market or marketed.
RMA states that the intent of the requirement is to ensure that dairy producers are not purchasing an amount of insurance in excess of the amount they can produce and potentially receive an indemnity payment that is in excess of actual losses. RMA states that some producers may be required to dump milk that would normally be marketed and, as a result, their insurance indemnities would be reduced even though they actually produced the volume of milk that is insured. RMA states that it recognizes the potential to have their coverage inadvertently reduced and is updating the requirements regarding marketed milk to ensure the policy functions as intended.
RMA states that for the 2020 calendar year, approved insurance providers (AIP) are authorized to count dumped milk towards the milk marketings or actual marketings, as applicable. RMA states that producers will still have to provide supporting documentation to the AIP from the cooperative or milk handler verifying the actual pounds dumped and that the milk was dumped. RMA states that the amount of eligible indemnity payment is unaffected by this change. Instead, RMA states this change avoids imposing a penalty that was not intended to apply in cases where a dairy producer had produced a volume of milk that is consistent with the amount of coverage purchased.
In addition, RMA states that it is also removing the testing requirements for dumped milk under the Dairy Revenue Protection Program for producers insuring milk under the component pricing option forced to dump milk. RMA states that AIPs may use the average butter fat and protein levels for dump milk not tested.
ANALYSIS – Having the milk marketings form the basis for coverage under the dairy policies makes sense because it precludes the over-insurance by covering more milk than the producer can produce, thereby creating losses. Further, basing the milk marketings on sold production also makes sense because it prevents over-insurance by providing incentives for producers to maximize their production when they have no market to sell the production. In this respect, the dairy policies are similar to crops that are sold under processing contracts. Only the amount of production contained in the contract is insured even through the producer may produce much more.
It appears that RMA’s actions in allowing milk that is dumped to be included in the milk marketings would not lead to over-insurance since it still corresponds to milk actually produced. Further, RMA is requiring that producers get documentation from the handler or cooperative to show the amount of milk dumped to ensure that it and the sold milk production correlates to the milk marketings for the purposes of coverage. In addition, since the milk handler or cooperative is ordering the milk dumping there should not be any concerns regarding incentivizing producers to over-produce milk. RMA also states that the eligible indemnity payment is unaffected allowing dumped milk to be included in the milk marketings. This is necessary because dumping of milk is not an insurable cause of loss so the policy could not pay on any loss of production.
This is a change to the policy after the contract change date, which as stated previously is always a concern, but it does not appear that this change will adversely affect the integrity of the dairy programs. RMA should consider approving revisions to the policies to adopt these changes.
All statements made are opinions of the author and are not intended to provide legal opinions or legal advice.