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Dairy Subtitle to the Agricultural Act of 2014Form-a-Feed – 04/02/14Dr. Marin Bozic
Major Dairy Provisions of the Agricultural Act of 2014
REPEALED NEW
Milk Income Loss Contract
Dairy Product Price Support Program
Dairy Export Incentive Program
Margin Protection Program for Dairy Producers
Dairy Product Donation Program
No More Price Floors
19981999
20002001
20022003
20042005
20062007
20082009
20102011
20122013
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
Europe Oceania USA
MILC is no more.
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
Margin Protection Program for Dairy Producers
Key features:• Voluntary program, with no supply management or any direct
disincentives for growth in low-margin periods.
• Protects dairymen from severe downturns in the milk price, rising livestock feed prices, or a combination of both.
• Does not impose production or gross income eligibility caps
• Very simple and hassle-free
Margin Protection Program Essentials
Actual Dairy Production MarginProduction History
Coverage PercentageCoverage Levels & Premiums
Actual Dairy Production Margin
Q: What margin does this margin insurance protect?
• All-milk price minus feed ration value• Single, national formula, cannot be customized
Actual Dairy Production Margin = U.S. All-Milk Price
- 1.0728 x NASS Corn Price ($/bu)- 0.00735 x AMS Soybean Meal (Central IL) ($/ton)- 0.0137 x NASS Alfalfa Hay ($/ton)
Actual Dairy Production Margin
2007
2008
2009
2010
2011
2012
2013
2014
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
Average Margin over 2007-2014: $7.90
Production History & Coverage Percentage
Q: How Much Milk Can I Insure?
Unlike old dairy safety net based on MILC, there are no categorical limits to size of the farm. You can insure up to 90% of your production history, which is the highest of your milk marketings in 2011, 2012, and 2013.
Each year, your production history willincrease based on national growth inmilk yield per cow.
Each year, you may choose coverage percentage of 25% to 90% of your production history, in 5% increments.
Treatment of Producers with Multiple Dairy Operations
Q: What if I have two or more dairies?
A: Each dairy is treated as a separate program participant. You can choose to enroll some, all, or none of your dairies.
While you cannot insure growth on your existing dairies, if you build a brand new facility, it seems likely you will be able to enroll it.
Beware! It is forbidden to ‘reconstitute’your business so as to profit more fromDairy the farm bill programs.
MPP Coverage Levels and Premiums
Premium ≤ 4mil lbs PH
($/cwt)Discounted Premium
Premium >4 M lbs. PH
($/cwt)
$4.00 $0.000 $0.00000 $0.000
$4.50 $0.010 $0.00750 $0.020
$5.00 $0.025 $0.01875 $0.040
$5.50 $0.040 $0.03000 $0.100
$6.00 $0.055 $0.04125 $0.155
$6.50 $0.090 $0.06750 $0.290
$7.00 $0.217 $0.16250 $0.830
$7.50 $0.300 $0.22500 $1.060
$8.00 $0.475 $0.47500 $1.360
MPP Indemnities
Q: When does the MPP pay indemnities?
Consecutive Two-Month
Periods 2012Two-month
Average
Coverage Level & Indemnities
$4.00 $6.50
January 7.57
February 5.82 6.70 0.00 0.00
March 4.94
April 4.26 4.60 0.00 1.90
May 3.41
June 3.51 3.44 0.56 3.06
July 2.74
August 2.98 2.86 1.14 3.64
September 5.51
October 7.28 6.39 0.00 0.14
MPP in Action: $4.00 Coverage Level
2007
2008
2009
2010
2011
2012
2013
2014
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
2007
2008
2009
2010
2011
2012
2013
2014
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
MPP in Action: $6.50 Coverage Level (Small Farms)
2007
2008
2009
2010
2011
2012
2013
2014
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
MPP in Action: $6.50 Coverage Level (Large Farms)
MILC vs MPP (@ $6.50) indemnities
Jan-F
eb
Mar-
Apr
May-J
un
Jul-
Aug
Sep-O
ctN
ov-D
ec
Jan-F
eb
Mar-
Apr
May-J
un
Jul-
Aug
Sep-O
ctN
ov-D
ec
Jan-F
eb
Mar-
Apr
May-J
un
Jul-
Aug
Sep-O
ctN
ov-D
ec
Jan-F
eb
Mar-
Apr
May-J
un
Jul-
Aug
Sep-O
ctN
ov-D
ec
Jan-F
eb
Mar-
Apr
May-J
un
Jul-
Aug
Sep-O
ctN
ov-D
ec
2009 2010 2011 2012 2013
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
MILC MPP
MPP in Action: $8.00 Coverage Level (Small Farms)
2007
2008
2009
2010
2011
2012
2013
2014
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
2007
2008
2009
2010
2011
2012
2013
2014
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
MPP in Action: $8.00 Coverage Level (Large Farms)
Three Examples
Farm A. 50 CowsProduction History: 1,100,000 lbs
Farm B. 600 CowsProduction History: 13,200,000 lbs
Farm C.3000 CowsProduction History: 66,000,000 lbs
Farm A: 50 Cows, PH = 1.1 Mil Lbs, 90% Coverage Pct
Premiums Catastrophic Milk
Price(2009)
Major Drought
(2012)2007-2013
Average
$4.00 $0 4,672 2,918 1,084
$4.50 $99 7,972 4,568 1,791
$5.00 $248 11,272 6,611 2,555
$5.50 $396 14,572 9,086 3,380
$6.00 $545 18,506 11,561 4,491
$6.50 $891 22,631 14,318 5,937
$7.00 $2,148 26,756 18,009 7,525
$7.50 $2,970 30,881 22,134 9,226
$8.00 $4,703 35,046 26,811 11,290
Farm A: 50 Cows – Net Indemnities
Premiums Catastrophic Milk
Price(2009)
Major Drought
(2012)2007-2013
Average
$4.00 $0 4,672 2,918 1,084
$4.50 $99 7,873 4,469 1,692
$5.00 $248 11,024 6,364 2,307
$5.50 $396 14,176 8,690 2,984
$6.00 $545 17,962 11,017 3,946
$6.50 $891 21,740 13,427 5,046
$7.00 $2,148 24,608 15,861 5,376
$7.50 $2,970 27,911 19,164 6,256
$8.00 $4,703 30,343 22,109 6,587
Farm A: 600 Cows, PH = 13.2 Mil Lbs, 90% Coverage Pct
Premiums Catastrophic Milk
Price(2009)
Major Drought
(2012)2007-2013
Average
$4.00 0 56,063 35,013 13,011
$4.50 1,976 95,663 54,813 21,497
$5.00 4,152 135,263 79,332 30,656
$5.50 9,480 174,863 109,032 40,556
$6.00 14,414 222,077 138,732 53,887
$6.50 26,452 271,577 171,813 71,238
$7.00 74,084 321,077 216,114 90,296
$7.50 95,528 370,577 265,614 110,714
$8.00 126,168 420,547 321,735 135,479
Farm A: 600 Cows – Net Indemnities
Premiums Catastrophic Milk
Price(2009)
Major Drought
(2012)2007-2013
Average
$4.00 0 56,063 35,013 13,011
$4.50 1,976 93,687 52,837 19,521
$5.00 4,152 131,111 75,180 26,504
$5.50 9,480 165,383 99,552 31,076
$6.00 14,414 207,663 124,318 39,473
$6.50 26,452 245,125 145,361 44,786
$7.00 74,084 246,993 142,030 16,212
$7.50 95,528 275,049 170,086 15,186
$8.00 126,168 294,379 195,567 9,311
Farm A: 3000 Cows, PH = 13.2 Mil Lbs, 90% Coverage Pct
Premiums Catastrophic Milk
Price(2009)
Major Drought
(2012)2007-2013
Average
$4.00 0 280,316 175,067 65,055
$4.50 11,480 478,316 274,067 107,483
$5.00 23,160 676,316 396,661 153,282
$5.50 57,000 874,316 545,161 202,782
$6.00 88,070 1,110,384 693,661 269,434
$6.50 164,260 1,357,884 859,065 356,192
$7.00 468,500 1,605,384 1,080,570 451,479
$7.50 599,240 1,852,884 1,328,070 553,571
$8.00 772,440 2,102,735 1,608,677 677,395
Farm A: 3000 Cows – Net Indemnities
Premiums Catastrophic Milk
Price(2009)
Major Drought
(2012)2007-2013
Average
$4.00 0 280,316 175,067 65,055
$4.50 11,480 466,836 262,587 96,003
$5.00 23,160 653,156 373,501 130,122
$5.50 57,000 817,316 488,161 145,782
$6.00 88,070 1,022,314 605,591 181,364
$6.50 164,260 1,193,624 694,805 191,932
$7.00 468,500 1,136,884 612,070 (17,021)
$7.50 599,240 1,253,644 728,830 (45,669)
$8.00 772,440 1,330,295 836,237 (95,045)
If you had a crystal ball, it would be all-or-nothing all the time
Optimal Choice Net Benefit
2005 $4.00 -$100
2006 $8.00 $1,652
2007 $4.00 -$100
2008 $4.00 -$100
2009 $8.00 $106,715
2010 $4.00 -$100
2011 $4.00 -$100
2012 $8.00 $79,300
2013 $8.00 $37,070
But we are not clueless…
But we are not clueless…
MPP Subsidies
Q: Are these premiums subsidized? I do not see subsidy percentage anywhere?
Expected Margins Near
Historical Average
Modestly Subsidized.
Expected Margins Much
Above Historical Average
Margin Insurance
Premiums are Too Expensive!
Expected Margins Much
Below Historical Average
Margin Insurance Premiums are Very Highly Subsidized.
Margin Protection Program vs. LGM-Dairy
Q: If I enroll in Margin Protection Program, Can I Still Use LGM-Dairy?
You may choose to participate in MPP or LGM-Dairy, but not both. This will most likely be a one-time decision.
LGM-Dairy vs MPP
Q: So which program should I choose? LGM-Dairy or MPP?
The key consideration is that LGM-Dairy program will continue to operate as a pilot program. All livestock gross margin products together have only $20 million available for subsidies and overhead per year. That is sufficient to cover only up to 3-4% of annual U.S. milk production.
If you choose LGM-Dairy, you are essentially betting that few other producers will do the same. If you choose LGM-Dairy, and a lot of other producers do the same, money for LGM-Dairy will run out very soon, and you will be left with no subsidized insurance program whatsoever.
MPP has no such budgetary limits.
Administration of MPP
Q: How do I enroll in the new margin protection program?
The program will be effective September 1, 2014. Whether that actually means that you insure production your milk production for Q4 2014, or that you can start signing up in September for 2015… that is unclear.
Details that are still unknown:1) Sign-up deadline?2) The level of flexibility in enrollment year after year?3) Indemnities based on PH or the lower of PH and actual
production?4) Enrollment of new dairies for multi-dairy producers?
Stay tuned…
Dairy Product Donation Program
Q: Is this new program similar to Dairy Product Price Support Program?
At any time that the margin is below $4 per cwt in each of two successive months, the Secretary of Agriculture must announce and implement a Dairy Product Donation Program. Under this program, the Secretary must1. Purchase dairy products for donation to Food Banks or other programs
that provide food assistance to individuals in low-income groups.2. “Distribute but not store” the dairy products purchased3. Do so "immediately and at "market prices"4. Consult with "public and private nonprofit organizations organized to
feed low-income populations" to "determine the types and quantities of dairy products to purchase"
5. Terminate the DPDP whenever one of a set of exit conditions exists.
Dairy Product Donation Program
Q: Is this new program similar to Dairy Product Price Support Program?
Sep-
08
Dec-0
8
Mar
-09
Jun-
09
Sep-
09
Dec-0
9
Mar
-10
Jun-
10
Sep-
100
50,000100,000150,000200,000250,000300,000
U.S. Government Stocks of Nonfat Dry Milk Powder
1,0
00 lbs
Economics of new farm bill dairy programs
Q: Will this work?
The challenge here is that we may be trying to do too much to protect against risk, not that the program may be ineffective. Side effects may include:
1) Lower activity in CME futures and options2) Favoring “lumpy” over “incremental” growth3) Prolonged duration of margin slumps4) Lower long-run IOFC margins
…but trading off some reward for lower risk may be our ticket to grow exports.
MPP vs futures & options
Q: How should I combine MPP with private risk instruments?
Conventional wisdom: Use MPP for passive catastrophic risk protection (e.g. always buy $6.50), and private risk markets for “shallow loss” protection if you need it.
A smarter way: If USDA sets the annual enrollment date near the end of the calendar year, you will be able to glean at expected margins in the year ahead before deciding what to do:
a) If expected margins are sufficiently high, consider locking in profit using futures & options, and if you manage to do that, then drop MPP to low coverage level
b) If expected margins are low – use MPP with high coverage levels (somewhat harder to do for large producers).
Take Home Lessons
1. No more price floors or MILC – risk management more important than ever before.
2. Margin Protection Program will offer affordable and effective catastrophic risk protection tool.
3. Enrollment likely in summer/early fall.
4. Still waiting for FSA rules that will define implementation parameters.
5. The Program on Dairy Markets and Policy will offer an online decision-support tool at www.dairymarkets.org to help you make an informed decision. In-person meetings will be offered throughout Wisconsin hosted by UW faculty and others.
A smarter way: If USDA sets the annual enrollment date near the end of the calendar year, you will be able to glean at expected margins in the year ahead before deciding what to do:
a) If expected margins are sufficiently high, try to lock in profit using futures & options, and if you manage to do that, then drop MPP to low coverage level
b) If expected margins are low – use MPP with high coverage levels (somewhat harder to do for large producers).
Dairy Subtitle to the Agricultural Act of 2014
Form-a-feed meetingHutchinson, MNApril 2, 2014
Dr. Marin [email protected] of Applied EconomicsUniversity of Minnesota-Twin Cities317c Ruttan Hall1994 Buford AvenueSt Paul, MN 55108
Photo Credits:Title Slide: Orange Patch Dairy, Sleepy Eye, MNCredits Slide: Zweber Family Farms, Elko, MN
