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Margin Protection Program for Dairy:Implementation, Participation, Consequences
Dr. Marin Bozicwith Chris Wolf, Fanda Yang, John Newton and Cam Thraen
AAEA 2014 Crop Insurance SymposiumOctober 8, 2014
Major Dairy Provisions of the Agricultural Act of 2014
2222
REPEALED
�Milk Income Loss
Contract
�Dairy Product
Price Support
Program
�Dairy Export
Incentive Program
�Dairy Forward
Pricing Program
�Dairy Price
Support Program
(“dairy cliff”)
�Livestock Gross
Margin for Dairy
Cattle
NEW
�Margin Protection
Program for Dairy
Producers
�Dairy Product
Donation Program
�Potential
California Federal
Order
Margin Protection Program for Dairy Producers
3333
� USDA risk management program that replaces MILC program.
� Voluntary program, with no supply management of any kind.
� Offers protection against low margins that may come from low
milk prices, high feed prices, or a combination of both.
� Provides a payment when “the margin” falls below a specified
level.
� Very simple and hassle-free
Key Questions
4444
� Do dairy producers understand the MPP-Dairy?
� Will they register to participate in the MPP-Dairy?
� Will the program suffer from adverse selection issue?
� Will producers still use private risk management programs?
� Will MPP-Dairy distort dairy markets?
MPP-Dairy Survey
5555
� Supported by Cooperative Agreement with USDA Office of the
Chief Economist
� 669 usable responses
� 327 internet respondents, 342 mail respondents
0
20
40
60
80
<100 100-199 200-499 500-999 1000-1999 2000+
% H
erd
s%
He
rds
% H
erd
s%
He
rds
Herd size (milk cows)Herd size (milk cows)Herd size (milk cows)Herd size (milk cows)US herds US production Survey
Self-Evaluated Current Knowledge about MPP-Dairy
6666
27.9
61.5
10.6
0
10
20
30
40
50
60
70
No knowledge Some knowledge A great deal of
knowledge
% R
esp
on
de
nts
% R
esp
on
de
nts
% R
esp
on
de
nts
% R
esp
on
de
nts
MPP Knowledge LevelMPP Knowledge LevelMPP Knowledge LevelMPP Knowledge Level
Self-Evaluated Current Knowledge about MPP-Dairy
7777
0
10
20
30
40
50
60
70
80
No knowledge Some knowledge A great deal of
knowledge
% R
esp
on
de
nts
% R
esp
on
de
nts
% R
esp
on
de
nts
% R
esp
on
de
nts <100 cows
100-199 cows
200-499 cows
500-999 cows
1000-1999 cows
2000+ cows
Self-Evaluated Current Knowledge about MPP-Dairy
8888
0
10
20
30
40
50
60
70
80
No knowledge Some knowledge A great deal of
knowledge
% R
esp
on
de
nts
% R
esp
on
de
nts
% R
esp
on
de
nts
% R
esp
on
de
nts <100 cows
100-199 cows
200-499 cows
500-999 cows
1000-1999 cows
2000+ cows
Will Dairy Producers Register for MPP-Dairy?
9999
18.8
12.1
30.5
26.2
12.4
0
5
10
15
20
25
30
35
Very unlikely Unlikely Undecided Likely Very likely
% R
esp
on
de
nts
% R
esp
on
de
nts
% R
esp
on
de
nts
% R
esp
on
de
nts
Likelihood of MPP SignLikelihood of MPP SignLikelihood of MPP SignLikelihood of MPP Sign----upupupup
Will Dairy Producers Register for MPP-Dairy?
10101010
0
5
10
15
20
25
30
35
40
Very unlikely Unlikely Undecided Likely Very likely
% R
esp
on
de
nts
% R
esp
on
de
nts
% R
esp
on
de
nts
% R
esp
on
de
nts
Northeast Upper Midwest Southeast Central/Plains/Mtn Pacific
Will Dairy Producers Register for MPP-Dairy?
11111111
0
5
10
15
20
25
30
35
40
45
Very unlikely Unlikely Undecided Likely Very likely
% R
esp
on
de
nts
% R
esp
on
de
nts
% R
esp
on
de
nts
% R
esp
on
de
nts
<100 cows 100-199 cows 200-499 cows
500-999 cows 1000-1999 cows 2000+ cows
Will Dairy Producers Register for MPP-Dairy?
12121212
0
10
20
30
40
50
60
70
80
90
Very unlikely Unlikely Undecided Likely Very likely
% R
esp
on
de
nts
% R
esp
on
de
nts
% R
esp
on
de
nts
% R
esp
on
de
nts
No knowledge Some knowledge A great deal of knowledge
Actual Dairy Production Margin: Historical
13131313
May-Jun '09: $2.49
Mar-Apr ‘14: $13.87
What Coverage Level will Dairy Producers Use?
14141414
28.6
2.9
10.8
6.5
25.4
11.7
6.1
2.0
6.1
0
5
10
15
20
25
30
35
$4.00 $4.50 $5.00 $5.50 $6.00 $6.50 $7.00 $7.50 $8.00
% R
esp
on
de
nts
% R
esp
on
de
nts
% R
esp
on
de
nts
% R
esp
on
de
nts
Margin Coverage Level ($/cwt)Margin Coverage Level ($/cwt)Margin Coverage Level ($/cwt)Margin Coverage Level ($/cwt)
MPP Coverage Levels and Premiums
15151515
Coverage
Level
Tier 1
≤ 4mil lbs CPH
($/cwt)
Tier 2
>4 M lbs. CPH
($/cwt)
$4.00 $0.000 $0.000
$4.50 $0.010 $0.020
$5.00 $0.025 $0.040
$5.50 $0.040 $0.100
$6.00 $0.055 $0.155
$6.50 $0.090 $0.290
$7.00 $0.217 $0.830
$7.50 $0.300 $1.060
$8.00 $0.475 $1.360
What Coverage Level will Dairy Producers Use?
16161616
0
5
10
15
20
25
30
35
40
4.00 4.50 5.00 5.50 6.00 6.50 7.00 7.50 8.00
% R
esp
on
de
nts
% R
esp
on
de
nts
% R
esp
on
de
nts
% R
esp
on
de
nts
Margin level ($/cwt)Margin level ($/cwt)Margin level ($/cwt)Margin level ($/cwt)
<100 cows
100-199 cows
200-499 cows
500-999 cows
1000-1999 cows
2000+ cows
What Coverage Level will Dairy Producers Use?
17171717
What Coverage Level will Dairy Producers Use?
18181818
0
5
10
15
20
25
30
35
40
45
4.00 4.50 5.00 5.50 6.00 6.50 7.00 7.50 8.00
% R
esp
on
de
nts
% R
esp
on
de
nts
% R
esp
on
de
nts
% R
esp
on
de
nts
Margin level ($/cwt)Margin level ($/cwt)Margin level ($/cwt)Margin level ($/cwt)
Northeast
Upper Midwest
Southeast
Central/Plains/Mtn
Pacific
MPP Coverage Levels and Premiums
19191919
Coverage
Level
Tier 1
≤ 4mil lbs CPH
($/cwt)
Tier 2
>4 M lbs. CPH
($/cwt)
$4.00 $0.000 $0.000
$4.50 $0.010 $0.020
$5.00 $0.025 $0.040
$5.50 $0.040 $0.100
$6.00 $0.055 $0.155
$6.50 $0.090 $0.290
$7.00 $0.217 $0.830
$7.50 $0.300 $1.060
$8.00 $0.475 $1.360
MPP-Dairy Subsidies are Implied in Margin Forecasts
20202020
Expected Margins
Near Historical
Average
Modestly
Subsidized.
Expected Margins
Above Historical
Average
MPP-Dairy
Premiums are Too
Expensive!
Expected Margins
Much Below
Historical Average
MPP-Dairy Premiums are
Very Highly Subsidized.
What Choices Will Dairy Producers Change Annually?
21212121
10.3
18.6
57.2
13.9
0
10
20
30
40
50
60
70
Adjust Coverage
Percentage
Adjust Coverage
Level
Adjust Both Change Neither
% R
esp
on
de
nts
% R
esp
on
de
nts
% R
esp
on
de
nts
% R
esp
on
de
nts
Open Interest in All Dairy Futures and Options
22222222
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
1996 2000 2004 2008 2012
Co
ntr
act
s
MPP vs LGM-Dairy – One Time Irreversible Choice
23232323
0
10
20
30
40
50
60
70
80
90
LGM users Non-LGM users
% R
esp
on
de
nts
% R
esp
on
de
nts
% R
esp
on
de
nts
% R
esp
on
de
nts
MPP
LGM
MPP vs LGM-Dairy – One Time Irreversible Choice
24242424
18
23.4
48.8
7.5
2.3
0 10 20 30 40 50 60
MPP will strongly reduce my use of
other risk management tools.
MPP will somewhat reduce my use of
other risk management tools.
MPP will not affect my use of other risk
management tools.
MPP will somewhat increase my use of
other risk management tools.
MPP will strongly increase my use of
other risk management tools.
% Respondents% Respondents% Respondents% Respondents
MPP vs LGM-Dairy – One Time Irreversible Choice
25252525
0 10 20 30 40 50 60
MPP will strongly reduce my use of
other risk management tools.
MPP will somewhat reduce my use of
other risk management tools.
MPP will not affect my use of other risk
management tools.
MPP will somewhat increase my use of
other risk management tools.
MPP will strongly increase my use of
other risk management tools.
% Respondents% Respondents% Respondents% Respondents
Milk price Risk Tool Non-users Milk Price Risk Tool Users
MPP vs LGM-Dairy – One Time Irreversible Choice
26262626
0 10 20 30 40 50 60
MPP will strongly reduce my use of
other risk management tools.
MPP will somewhat reduce my use of
other risk management tools.
MPP will not affect my use of other risk
management tools.
MPP will somewhat increase my use of
other risk management tools.
MPP will strongly increase my use of
other risk management tools.
% Respondents% Respondents% Respondents% Respondents
Milk price Risk Tool Non-users Milk Price Risk Tool Users
Safety-First Preferences and Crowding Out
27272727
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
$13.00 $14.00 $15.00 $16.00 $17.00
% o
f p
rod
uct
ion
th
at
mu
st b
e h
ed
ged
Critical Milk Revenue Threshold
Oct 1, 2008 sign-up for 2009 Coverage Period
Milk Futures Only
Futures & MPP (CL:$6.50, CP:90%)
Crowding-out
Dynamic Market Effects of MPP-Dairy
28282828Source: http://dairymarkets.org/Workshops/2014Milwaukee/Presentation/Nicholson.pdf
Cumulative Net Farm Operating Income for US Dairy Farms
29292929Source: http://dairymarkets.org/PubPod/Pubs/WP14-03.pdf
Cumulative Net Farm Operating Income for US Dairy Farms
30303030Source: http://dairymarkets.org/PubPod/Pubs/WP14-03.pdf
Dairy Producer Impression of MPP-Dairy
31313131
14.7 15.8
41.7
23.7
4.1
0
5
10
15
20
25
30
35
40
45
Very
Unfavorable
Somewhat
Unfavorable
Neutral Somewhat
favorable
Very
Favorable
% R
esp
on
de
nts
% R
esp
on
de
nts
% R
esp
on
de
nts
% R
esp
on
de
nts
Dairy Producer Impression of MPP-Dairy
32323232
13.9
3.0
18.1
37.1
45.4
29.1
29.1
9.9
0 10 20 30 40 50
Basis risk
Too cheap
Too expensive
Difficult to understand
Too much government involvement
No supply management
Will distort market signals to farmers
Other
% Respondents% Respondents% Respondents% Respondents
What Do We Find?
33333333
� Do dairy producers understand the MPP-Dairy?
� Outreach is critical.
� Will they register to participate in the MPP-Dairy?
� 50-60% of producers, 60% of milk for 2015.
� Will the program suffer from adverse selection issue?
� Yes, very likely.
� Will producers still use private risk management programs?
� 40% of producers indicate they will reduce usage of other
instruments.
� Will MPP-Dairy distort dairy markets?
� Possibly, but fears about distortion – may reduce distortions.
Margin Protection Program for Dairy Producers:Implementation, Participation, Consequences
Co-authors:Chris Wolf (Michigan State University)Fanda Yang (PhD Student, University of Minnesota)John Newton (University of Illinois Urbana-Champaign)Cameron Thraen (The Ohio State University)
Dr. Marin [email protected] of Applied EconomicsUniversity of Minnesota-Twin Cities317c Ruttan Hall1994 Buford AvenueSt Paul, MN 55108
