Transcript Dairy Subtitle to the Agricultural Act of 2014 Dr. Marin Bozic.

Dairy Subtitle to the Agricultural Act of 2014
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REPEALED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
$0.00
Margin Protection Program for Dairy Producers
Key features:
• Voluntary program, with no supply management or any direct
disincentives for growth in low-margin periods.
• Protects dairymen from severe downturns in the milk price, rising
livestock feed prices, or a combination of both.
• Does not impose production or gross income eligibility caps
• Very simple and hassle-free
Margin Protection Program Essentials
Actual Dairy Production Margin
Production History
Coverage Percentage
Coverage Level
Actual Dairy Production Margin
Q: What margin does this margin insurance protect?
• All-milk price minus feed ration value
• Single, national formula, cannot be customized
Actual Dairy Production Margin =
U.S. All-Milk Price
- 1.0728 x NASS Corn Price ($/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
Friendly to Dairies of All Sizes
Farm A.
50 Cows
Production History: 1,100,000 lbs
Farm B.
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 B: 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 B: 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 we had the crystal ball…
Year
Optimal
Strategy
Optimal Outcome
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
Scenario 1: Expected Catastrophic Margins
Scenario 1: Expected Low Margins
Premiums
Expected
Indemnity
Net
Indemnity
$4.00
$0.00
$0.21
$0.21
$4.50
$0.02
$0.35
$0.34
$5.00
$0.03
$0.54
$0.51
$5.50
$0.07
$0.78
$0.71
$6.00
$0.11
$1.04
$0.94
$6.50
$0.19
$1.33
$1.14
$7.00
$0.52
$1.65
$1.13
$7.50
$0.68
$1.98
$1.30
$8.00
$0.92
$2.33
$1.41
Scenario 2: Expected High Margins
Scenario: Expected High Margins
Premiums
Expected
Indemnity
Net
Indemnity
$4.00
$0.00
$0.01
$0.01
$4.50
$0.02
$0.02
$0.01
$5.00
$0.03
$0.04
$0.01
$5.50
$0.07
$0.06
-$0.01
$6.00
$0.11
$0.10
$0.00
$6.50
$0.19
$0.15
-$0.04
$7.00
$0.52
$0.23
-$0.29
$7.50
$0.68
$0.34
-$0.34
$8.00
$0.92
$0.47
-$0.45
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!
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).
MPP vs futures & options
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:
AEM3040 Spring 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