The income over feed cost (IOFC) margin represents the difference between milk receipts received and feed expenses incurred. The margin is important because it is what’s used to first pay all other expenses, including those for labor, land and other inputs, and then ultimately whatever is left for profit. In 2014, the U.S. introduced the Margin Protection Program (MPP). Under it, dairies would be eligible to receive payments if the national income over feed cost margin failed to meet a certain level for a given two-month time period. The Dairy Margin Coverage Program that replaced the MPP beginning in 2018 has taken a similar focus. It makes payments if the national IOFC margin fails to meet a certain established threshold.
In a recent study, I and colleagues from University of Missouri and University of Wisconsin Madison examined how well the the national IOFC margin reflected farm-IOFC margins for 776 dairy farms in Wisconsin from 2000 to 2017. We further examined a) the relationship between IOFC margin and profit risk and b) how IOFC margin and MPP payments affected terminal stress risk. Our analysis focused on a sample of 776 farms in Wisconsin from 2000-2017.
We found that farm‐specific IOFC margins were not highly correlated with the national margin. What this implies is that the MPP addressed some dairy operating margin risk, but it didn’t completely eliminate such risk. We further found that higher farm IOFC margin increased profit variance but reduced downside risk exposure. Regarding farm terminal stress, the analysis showed that the IOFC margin did not affect the likelihood of the sample farms experiencing terminal stress and MPP payments had an insignificant effect on terminal stress risk.
Read the full study here.