Transcript Dairy Programs in the 2013 Farm Bill What can we learn from crop insurance? Dr.

Dairy Programs in the 2013 Farm Bill
What can we learn from crop insurance?
Dr. Marin Bozic
University of Minnesota
Prepared for MN Dairy Leaders
Roundtable
June 3, 2013 Arden Hills, MN
Our group…
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John Newton
Cameron Thraen
Mark Stephenson
Brian Gould
Chris Wolf
Marin Bozic
http://aede.osu.edu/dairybriefing
New face of volatility: Income-over-feedcosts margin risk
Designing new dairy safety net
Dairy Market Stabilization Program:
 When margins are critically low, provides temporary
disincentives to milk production growth.
Dairy Producer Margin Protection Program:
 Hybrid between countercyclical payments program
and subsidized margin insurance program.
Dairy Market Stabilization Program
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
$/cwt
16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
-
If, effective, DMSP could indeed accelerate
margin recovery
Average
Annual
Simulated
Margin
Less than $5.00
DSA – if DSMP
is Highly
Effective
GoodlatteScott
How much
more likely is
scenario under
G-S?
1.46%
8.86%
6.1
$5.00-$6.00
$6.00-$7.00
$7.00-$8.00
Over $8.00
10.66%
38.88%
30.06%
18.94%
19.96%
29.68%
23.98%
17.52%
1.9
0.8
0.8
0.9
Based on margins forecasted with January 15, 2013 data.
Elasticity of Demand: -0.20
Milk Volume Participation: 75%
DMSP: Stabilization base for a growing dairy
Importance and Fragility of Dairy Exports
• U.S. dairy exports now
consume one day worth
of milk production per
week.
• Over the last 10 years,
over half of the growth in
U.S. milk production was
exported.
• Over the last 5 years, over
two thirds of the growth
in U.S. milk production
was exported.
Milk yield per cow in NZ is highly
volatile due to pasture-based
production system. That means that we
should anticipate large swings in U.S.
milk prices in the coming decade.
Pro and contra stabilization program
Why it might be a good idea:
 It could reduce government costs.
 It could accelerate margin recovery in low-margin states of the
world.
 Does not present a long-term obstacle for milk production
growth, even for farms with aggressive growth plans
Why it might not be such a good idea:
 Creative private contracts could reduce effectiveness.
 Interference with spatial structural changes
 Slippery Slope argument: What will happen in 2018 Farm Bill?
Jan-04
Jun-04
Nov-04
Apr-05
Sep-05
Feb-06
Jul-06
Dec-06
May-07
Oct-07
Mar-08
Aug-08
Jan-09
Jun-09
Nov-09
Apr-10
Sep-10
Feb-11
Jul-11
Dec-11
May-12
Oct-12
Basic Margin Protection
$16.00
$14.00
$12.00
$10.00
$8.00
$6.00
$4.00
$2.00
$0.00
Jan-04
Jun-04
Nov-04
Apr-05
Sep-05
Feb-06
Jul-06
Dec-06
May-07
Oct-07
Mar-08
Aug-08
Jan-09
Jun-09
Nov-09
Apr-10
Sep-10
Feb-11
Jul-11
Dec-11
May-12
Oct-12
Supplemental Margin Protection:
$6.50 Coverage Level
$16.00
$14.00
$12.00
$10.00
$8.00
$6.00
$4.00
$2.00
$0.00
Coverage
Level
Protects:
Actual
Production
History
Crop
Revenue
Coverage
Individual
Yield
Individual
Revenue
(yield x
price)
CAT
100%
50%
55%
60%
65%
67%
67%
64%
64%
59%
64%
64%
59%
70%
75%
80%
59%
55%
48%
59%
55%
48%
85%
38%
38%
What can we learn
from crop insurance?
Yield: Individual historical
yield.
Price: Expected harvest
price is the average
December's futures
contract prices during
February.
What can we learn from crop insurance?
Principle: decide before you plant; pay when you harvest.
Supplemental Margin Protection – Premiums for
Production over 4 million lbs
Coverage
Level
$4.00
$4.50
$5.00
$5.50
$6.00
$6.50
$7.00
$7.50
$8.00
Senate 2013
House 2013
Dairy
Freedom Act
$0.00
$0.00
$0.02
$0.04
$0.08
$0.16
$0.23
$0.43
$0.59
$0.92
$0.03
$0.05
$0.07
$0.11
$0.19
$0.29
$0.38
$0.83
$1.06
$0.02
$0.04
$0.10
$0.15
$0.29
$0.62
$0.83
$1.06
Premiums are fixed for the next five years, but
conditions may vary…
Source: Newton, J. NWDEPA 2013
Six beginning-of-year margin scenarios
Dairy programs in the 2013 Farm Bill
What can we learn from crop insurance?
prepared for MN Dairy Leaders
Roundtable
Monday, June 3, 2013
Arden Hills, MN
Dr. Marin Bozic
[email protected]
Department of Applied Economics
University of Minnesota-Twin
Cities