Dairy Subtitle to the Agricultural Act of 2014
Form-a-Feed – 04/02/14
Dr. Marin Bozic
Major Dairy Provisions of the Agricultural Act of 2014
REPEALED
Milk Income Loss Contract
Dairy Product Price
Support Program
Dairy Export Incentive
Program
NEW
Margin Protection
Program for Dairy
Producers
Dairy Product Donation
Program
No More Price Floors
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00
Europe
Oceania
USA
MILC is no more.
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00
Margin Protection Program for Dairy Producers
Key features:
• Voluntary program, with no supply management or any direct
disincentives for growth in low-margin periods.
• Protects dairymen from severe downturns in the milk price, rising
livestock feed prices, or a combination of both.
• Does not impose production or gross income eligibility caps
• Very simple and hassle-free
Margin Protection Program Essentials
Actual Dairy Production Margin
Production History
Coverage Percentage
Coverage Levels & Premiums
Actual Dairy Production Margin
Q: What margin does this margin insurance protect?
• All-milk price minus feed ration value
• Single, national formula, cannot be customized
Actual Dairy Production Margin =
U.S. All-Milk Price
- 1.0728 x NASS Corn Price ($/bu)
- 0.00735 x AMS Soybean Meal (Central IL) ($/ton)
- 0.0137 x NASS Alfalfa Hay ($/ton)
Actual Dairy Production Margin
16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
Average Margin over 2007-2014: $7.90
Production History & Coverage Percentage
Q: How Much Milk Can I Insure?
Unlike old dairy safety net based on MILC, there are no categorical
limits to size of the farm. You can insure up to 90% of your
production history, which is the highest of your milk marketings in
2011, 2012, and 2013.
Each year, your production history will
increase based on national growth in
milk yield per cow.
Each year, you may choose coverage percentage
of 25% to 90% of your production history,
in 5% increments.
Treatment of Producers with Multiple Dairy Operations
Q: What if I have two or more dairies?
A: Each dairy is treated as a separate program participant. You can
choose to enroll some, all, or none of your dairies.
While you cannot insure growth on your existing dairies, if you build
a brand new facility, it seems likely you will be able to enroll it.
Beware! It is forbidden to ‘reconstitute’
your business so as to profit more from
Dairy the farm bill programs.
MPP Coverage Levels and Premiums
Premium
≤ 4mil lbs PH
($/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
2012
January
7.57
February
5.82
March
4.94
April
4.26
May
3.41
June
3.51
July
2.74
August
2.98
September
5.51
October
7.28
Two-month
Average
Coverage Level
& Indemnities
$4.00
$6.50
6.70
0.00
0.00
4.60
0.00
1.90
3.44
0.56
3.06
2.86
1.14
3.64
6.39
0.00
0.14
MPP in Action: $4.00 Coverage Level
16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
MPP in Action: $6.50 Coverage Level (Small Farms)
16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
MPP in Action: $6.50 Coverage Level (Large Farms)
16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
MILC vs MPP (@ $6.50) indemnities
2009
2010
2011
MILC
MPP
2012
Sep-Oct
May-Jun
Jan-Feb
Sep-Oct
May-Jun
Jan-Feb
Sep-Oct
May-Jun
Jan-Feb
Sep-Oct
May-Jun
Jan-Feb
Sep-Oct
May-Jun
Jan-Feb
$4.50
$4.00
$3.50
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00
2013
MPP in Action: $8.00 Coverage Level (Small Farms)
16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
MPP in Action: $8.00 Coverage Level (Large Farms)
16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
Three Examples
Farm A.
50 Cows
Production History: 1,100,000 lbs
Farm B.
600 Cows
Production History: 13,200,000 lbs
Farm C.
3000 Cows
Production History: 66,000,000 lbs
Farm A: 50 Cows, PH = 1.1 Mil Lbs, 90% Coverage Pct
Catastrophic Milk
Premiums
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
Catastrophic Milk
Premiums
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
Catastrophic Milk
Premiums
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
Catastrophic Milk
Premiums
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
Catastrophic Milk
Premiums
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
Catastrophic Milk
Premiums
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
Much Below
Historical Average
Expected Margins
Near Historical
Average
Expected Margins
Much Above
Historical Average
Margin Insurance
Premiums are Very Highly
Subsidized.
Modestly
Subsidized.
Margin Insurance
Premiums are Too
Expensive!
Margin Protection Program vs. LGM-Dairy
Q: If I enroll in Margin Protection Program, Can I Still Use LGMDairy?
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 must
1. 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 purchased
3. 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?
1,000 lbs
U.S. Government Stocks of Nonfat Dry Milk
Powder
300,000
250,000
200,000
150,000
100,000
50,000
0
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)
2)
3)
4)
Lower activity in CME futures and options
Favoring “lumpy” over “incremental” growth
Prolonged duration of margin slumps
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.
Dairy Subtitle to the Agricultural Act of 2014
Form-a-feed meeting
Hutchinson, MN
April 2, 2014
Dr. Marin Bozic
[email protected]
Department of Applied Economics
University of Minnesota-Twin Cities
317c Ruttan Hall
1994 Buford Avenue
St Paul, MN 55108
Photo Credits:
Title Slide: Orange Patch Dairy, Sleepy Eye, MN
Credits Slide: Zweber Family Farms, Elko, MN