Marin Bozic

Midwest Dairy Expo

St. Cloud, MN November 27-28, 2012

?20123 Farm Bill

1) Big changes I: What Goes Away

2) Big changes II: What’s Coming Up

3) Income over Feed Costs Margins

4) Margin Insurance

5) Stabilization Program

Plan for today

• September 2011: Rep. Peterson introduces Dairy Security Act of 2011

• May 2012: Senate passes S3240 (Senate version of Farm bill)

• July 2012: House Ag. Committee passes HR 6083 (House version of Farm bill)

• August 2012: The country goes crazy until elections are over

• This week: Some movement finally?

New federal dairy policy - timeline

• Dairy Products Price Support Program – as of December 31, 2012

• Milk Income Loss Contract (MILC) – gone as of October 1, 2012

Discontinued programs

No more price floors – milk powder prices will integrate with the rest of the world

0

0.5

1

1.5

2

2.5

3

OceaniaEuropeUSA (Central)USA (Support)

MILC was a big help for small producers

Oct-11

Nov-11

Dec-11

Jan-12

Feb-12

Mar-12

Apr-12

May-12

Jun-12

Jul-12

Aug-12

Sep-12

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

$1.40

$1.60

$1.80

From Foundation for the Futureto 2012 Farm Bill

• All-Milk ($/cwt)

- 1.0728 x Corn ($/bu)

- 0.0735 x Soybean meal ($/ton)

- 0.0137 x Alfalfa hay ($/ton)

• Feed ration per cwt of milk: • 30 pounds of shell corn, • 106.4 pounds of corn silage, • 14.7 pounds of soybean meal• 27.4 lbs of alfalfa hay

Income over Feed Costs Margin

Where does this formula come from?

Where does this formula come from?

Income over Feed Costs Margin: 2004-2012

Jan-

04

Aug-0

4

Mar

-05

Oct-05

May

-06

Dec-0

6

Jul-0

7

Feb-0

8

Sep-0

8

Apr-0

9

Nov-0

9

Jun-

10

Jan-

11

Aug-1

1

Mar

-12

Oct-12

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

• Official name: Dairy Producer Margin Protection Program (PDMPP)

• Two layers: • Basic Margin Protection – “Free” protection at

$4.00 margin• Supplemental Margin Protection – Can buy up

from $4.50 to $8.00 margin in 50 cents increments (called “Coverage Level”)

Subsidized margin insurance

1) Supplemental Margin Protection Premiums (annual):

Supplemental Margin ProtectionPremiums for the first 4mil lbs

1) Supplemental Margin Protection Premiums (annual):

Supplemental Margin ProtectionPremiums for above 4mil lbs

Basic Margin Protection

Jan-04Feb-05Mar-06Apr-07May-08Jun-09 Jul-10 Aug-11Sep-12$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

Supplemental Margin Protection: $6.50 coverage level

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

Supplemental Margin Protection: $8.00 coverage level

Jan-04Jan-05Jan-06Jan-07Jan-08Jan-09Jan-10Jan-11Jan-12$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

Supplemental Margin Protection: $8.00 coverage level

Jan-04Jan-05Jan-06Jan-07Jan-08Jan-09Jan-10Jan-11Jan-12$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

DPMPP: What triggers it exactly?Consecutive Two-Month

Periods2012

Two-month

Average

January 7.57

February 5.82 6.70

March 4.94

April 4.26 4.60

May 3.41

June 3.51 3.44

July 2.74

August 2.98 2.86

September 5.51

October 7.28 6.39

• Calendar year is divided into consecutive two-month periods

• Average margin must be below the purchased coverage level in order for indemnities to be due.

DPMPP: What is the payment rate?

Consecutive Two-Month

Average

Jan – Feb 6.72

Mar-Apr 4.59

May-Jun 3.44

Jul-Aug 2.86

Sep-Oct 5.90

• Basic Margin Protection

The difference between the actual margin and $4.00, except that, if the difference is more than $4.00, the Secretary shall use $4.00

• Example: Jerry subscribed for basic margin protection. For Jul-Aug, payment rate was $1.14 per cwt. If Jul-Aug margin was -$0.50, payment would have been $4.00 per cwt.

DPMPP: What is the payment base?

Consecutive Two-Month

Average

Jan – Feb 6.72

Mar-Apr 4.59

May-Jun 3.44

Jul-Aug 2.86

Sep-Oct 5.90

• Supplemental Margin Protection:

The difference between coverage level and the greater of actual margin and $4.00.

Example: Jerry also subscribed for supplemental margin protection at $6.50 coverage level. For Jul-Aug, the payment rate on supplemental was $6.50- max($4.00, $2.86) = $2.50

DPMPP: What is the payment base?

Basic Production History- Used in Basic Margin Protection- Equal to the highest annual milk marketings in

any 1 of the 3 calendar years immediately preceding the calendar year in which the participating dairy signed up

Annual Production History:- Used in Supplemental Margin Protection- Equal to the actual milk marketings of the

participating dairy during the preceding calendar year

• Basic Margin Protection:

Actual DPMPP base used for indemnity is the lesser of

- 80 percent of the basic production history, divided by 6

- Actual quantity of milk marketed during the consecutive 2-month period

DPMPP: What is the actual payment base?

Supplemental Margin Protection:• Coverage Percentage must be chosen by

producer: not less than 25 percent, nor more than 90 percent of annual production history

• Actual DPMPP base used for indemnity is chosen coverage percentage times the lesser of - Annual production history divided by 6- Actual quantity of milk marketed during the consecutive

2-month period

DPMPP: What is the actual payment base?

Jerry has a farm with 150 milking cows, with rolling herd average of 21,000 lbs. His annual milk marketings were:

2009: 3,140,146 lbs

2010: 3,142,638 lbs

2011: 3,130,758 lbs• His basic production history is 3,142,638 lbs.

His annual production history is 3,130,758 lbs.

DPMPP payment base - example

• In July-August period, milk production on his farm was 528,229lbs.

• Basic Margin Protection actual base:Min(0.8x3,142,638/6, 528,229)

= min(419,018; 528,229) = 419,018.• Supplemental Margin Protection actual base

(with coverage percentage of 90 percent)

0.9 x min(3,130,758/6, 528,229)

= 0.9 x min (521,793, 528,229) = 469,613

DPMPP payment base - example

• For July-August period, Jerry would get:

Basic Margin Protection: $1.14/cwt x 4,190 cwt = $4,476

Supplemental Margin Protection (@$6.50 coverage level): $2.50 x 4,696 cwt = 11,740

Total = $16,216

DPMPP – putting it all together

Consecutive Two-Month

Average

Jan – Feb 6.72

Mar-Apr 4.59

May-Jun 3.44

Jul-Aug 2.86

Sep-Oct 5.90

Effective indemnity per cwt marketed: $3.07/cwt

1) Entry fee (annual):

2) Premiums for supplemental margin protection…

DPMPP – how much does it cost?

Trigger:- Actual margins of $6.00

or less for each of the immediately preceding two months

- Actual margin of $4.00 or less for the immediately preceding month

Dairy Market Stabilization Program

Month 2012

January 7.57

February 5.82

March 4.96

April 4.26

May 3.41

June 3.51

July 2.74

August 2.98

September 5.51

October 7.28

• Volume of average milk marketings for the three months immediately preceding the announcement that the stabilization program is activated

OR• Volume of monthly milk marketings for the

same month in the preceding year as the month in which DMSP is declared active

DMSP – What is the stabilization base?

• Producer is not going to be paid for more than the greater of… – If margins were $5.00-$6.00:

• 98 percent of stabilization base• 94 percent of the marketings of milk

– If margins were $4.00-$5.00• 97 percent of stabilization base• 93 percent of the marketings of milk

– If margins were less than $4.00• 96 percent of stabilization base• 92 percent of the marketings of milk

DMSP – what is the “penalty”?

Expected returns in 2013 for 150 cow operationCoverage Level

Fees & Premiums

Expected Indemnity

DMSP Penalty

Net Revenue

$4.00 250 5,369 4,578 542 $4.50 532 7,569 4,578 2,459 $5.00 954 10,390 4,578 4,858 $5.50 1,377 13,938 4,578 7,984 $6.00 2,081 18,327 4,578 11,667 $6.50 2,786 23,580 4,578 16,216 $7.00 12,479 29,770 4,578 12,713 $7.50 16,874 37,103 4,578 15,651 $8.00 26,229 45,862 4,578 15,055

Expected returns in 2013 for 150 cow operation (per cwt)Coverage Level

Fees & Premiums

Expected Indemnity

DMSP Penalty

Net Revenue

Return on invest.

$4.00 0.01 0.17 0.15 0.02 317%$4.50 0.02 0.24 0.15 0.08 562%$5.00 0.03 0.33 0.15 0.15 609%$5.50 0.04 0.44 0.15 0.25 680%$6.00 0.07 0.58 0.15 0.37 661%$6.50 0.09 0.75 0.15 0.51 682%$7.00 0.40 0.95 0.15 0.40 202%$7.50 0.54 1.18 0.15 0.50 193%$8.00 0.83 1.46 0.15 0.48 157%

Expected returns in 2013 for 150 cow operation ($ per cow)Coverage Level

Fees & Premiums

Expected Indemnity

DMSP Penalty

Net Revenue

Break-even %

$4.00 2 36 31 4 17%$4.50 4 50 31 16 24%$5.00 6 69 31 32 31%$5.50 9 93 31 53 42%$6.00 14 122 31 78 55%$6.50 19 157 31 108 64%$7.00 83 198 31 85 54%$7.50 112 247 31 104 58%$8.00 175 306 31 100 57%

Expected returns in 2013 for 1000 cow operationCoverage Level

Fees & Premiums

Expected Indemnity

DMSP Penalty

Net Revenue

$4.00 500 35,796 30,519 4,777$4.50 3,138 50,460 30,519 16,804$5.00 6,866 69,265 30,519 31,880$5.50 14,239 92,923 30,519 48,165$6.00 26,376 122,177 30,519 65,282$6.50 38,664 157,197 30,519 88,014$7.00 82,025 198,465 30,519 85,921$7.50 111,329 247,355 30,519 105,507$8.00 173,694 305,744 30,519 101,532

Expected returns in 2013 for 1000 cow operation ($ per cow)Coverage Level

Fees & Premiums

Expected Indemnity

DMSP Penalty

Net Revenue

Break-even %

$4.00 1 36 31 5 17%$4.50 3 50 31 17 24%$5.00 7 69 31 32 31%$5.50 14 93 31 48 40%$6.00 26 122 31 65 48%$6.50 39 157 31 88 55%$7.00 82 198 31 86 54%$7.50 111 247 31 106 58%$8.00 174 306 31 102 58%

• New dairy policy will be based on subsidized margin insurance, likely complemented with market stabilization program

• Premiums for DPMPP are fixed, and heavily subsidized. It makes economic sense to consider participating in these programs.

The Bottom Line

2012 Farm Bill

presented at the Midwest Dairy Expo St Cloud, MN, November 27, 2012

Dr. Marin Bozicmbozic@umn.eduDepartment of Applied EconomicsUniversity of Minnesota-Twin Cities317c Ruttan Hall1994 Buford AvenueSt Paul, MN 55108

You may download this presentation at http://marinbozic.info/