Dairy Policy Reforms and Advanced Dairy Risk Management Strategies

Dr. Marin Bozic

Vita Plus 2014 Dairy SummitRed Wing, MN, December 10, 2014

Agenda For Today

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1. MPP-Dairy: Time To Decide2. What Will You Do?3. Tools and Resources at Your Disposal4. Is MPP-Dairy Useless Out West?5. IS MPP-Dairy Subsidized?6. What Happens to Supply Dynamics Once MPP Kicks In?7. Outlook for 2015 – Say Cheese (Nobody’s Smiling)

MPP-Dairy: Time to Make a Decision

3

MPP-Dairy signup as of Dec 3:

Texas: 75%

New Mexico: 64%

Nebraska: 46%

Minnesota: 42%

California: 32%

Wisconsin: 30%

Idaho: 18%

Pennsylvania: 16%

Txt surveys on MPP-Dairy

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Txt surveys on MPP-Dairy

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Txt surveys on MPP-Dairy

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Txt surveys on MPP-Dairy

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Resources as you make your decision: 1. The FSA Tool

8

http://DairyMarkets.org/MPP/Tool

http://DairyMarkets.org/MPP/Dashboard

Resources for MPP-Dairy Decision: 2. MPP Dashboard

Resources for MPP-Dairy Decision: 3. UMN Online Course

10http://farmbill.umn.edu

Would MPP-Dairy Help Western Dairies?

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• “The situation in California is the worst of both worlds: Its all-milk price is consistently lower than the national average, andits feed costs are consistently higher. As a result; the state'smargin since 2007 has averaged $2.4 7 less than the nationalmargin.”

• “As national margins erode, Western margins will drop lowerbecause they already are lower. Profits will disappear faster.Losses will happen sooner and they will be bigger.”

Hoard’s Dairyman West, September 25, 2014.

MPP-Dairy: Milk Price Basis (Region Minus US All-Milk)

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-2.00

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2007 2008 2009 2010 2011 2012 2013

Upper Midwest Texas Idaho California

MPP-Dairy: Feed Cost Basis (Region Minus MPP Feed)

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-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

2007 2008 2009 2010 2011 2012 2013

Upper Midwest Texas Idaho California

Homegrown feed valued at market prices. Replacement heifers feed costs included.

MPP-Dairy: Milk Income over Feed Costs Margin Basis

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-5.00

-4.00

-3.00

-2.00

-1.00

0.00

1.00

2.00

3.00

2007 2008 2009 2010 2011 2012 2013

Upper Midwest Texas Idaho California

What kind of risk protection do I need?

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Loss Tolerance

Other Operating Costs

Required Farm-level IOFC Margin

IOFC Basis

MPP-Dairy Effectiveness

Other Operating Costs (Excluding Feed, Herd Replacement and Depreciation)

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$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

2007 2008 2009 2010 2011 2012 2013

Upper Midwest Texas Idaho California

How much would MPP-Dairy help in a year like 2009?

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-$6.00

-$5.00

-$4.00

-$3.00

-$2.00

-$1.00

$0.00

Upper Midwest Texas Idaho California

20

09

Net

Far

m In

com

e Pe

r C

wt

Full Loss Loss after MPP

71% 55% 44% 53%

Max Loss Calculator

Item Value

Non-Feed Costs of Production $7.75

Expected IOFC Basis over MPP in a Bad Year

$2.00

2015 Milk Production Growth over Production History

3%

Coverage Percentage 90%

Percent of 2015 Milk Covered Under MPP 87.4%

Needed MPP IOFC for No Losses $6.58

MPP Coverage Level $5.00

MPP Premiums $0.04

Maximum Losses $1.62

Is MPP-Dairy Subsidized?

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

$1.40

$4.00 $4.50 $5.00 $5.50 $6.00 $6.50 $7.00 $7.50 $8.00

First 4 M lbs PH After 4 M lbs PH

MPP-Dairy Subsidies are Implied in Margin Forecasts

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Expected Margins Near Historical

Average

Modestly Subsidized.

Expected Margins Much Above

Historical Average

Margin Insurance Premiums are Too

Expensive!

Expected Margins Much Below

Historical Average

Margin Insurance Premiums are Very Highly

Subsidized.

Comparing MPP-Dairy vs. CSC’s Revenue over Feed

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

$18.00

2007 2008 2009 2010 2011 2012 2013 2014

USDA MPP-Dairy Margin CSC Revenue over Feed

CSC ROF: Class III Milk – CME Corn – 0.01 CME Soybean Meal

MPP-Dairy: All-Milk – 1.0728* NASS Corn – 0.00735 * AMS Soybean Meal – 0.0137 * Alfalfa Hay

Comparing MPP-Dairy vs. CSC’s ROF Puts

Coverage Level

CSC Revenue over Feed Puts 12/9/2014 USDA

H1 2015 H2 2015

$6.00 $0.26 $0.54 $0.16

$7.00 $0.47 $0.79 $0.83

$8.00 $0.81 $1.12 $1.36

Strikes up to $6.00 are likely to be cheaper through FSA. Strikes above $6.00 are likely to be cheaper from the private sector. Private sector products can be customized. For example, $7.00 Long Put + $10 Short Call costs only $0.11 for 2015 (plus service charge of $0.004/cwt/month).

Source: http://www.aghedgedesk.com/

CSC’s Revenue over Feed 2001/01 – 2014/11

Hedge Front Months for the Show, Hedge Back Months for the Dough!

Txt surveys on MPP-Dairy

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Txt surveys on MPP-Dairy

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Will MPP-Dairy Change the Supply Dynamics?

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Low Margins and Supply Dynamics: Wisconsin

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Nicholson & Stephenson: Simulated MPP Margins 2015-18

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0.00

2.00

4.00

6.00

8.00

10.00

12.00

Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18

$/c

wt

Old Dairy Programs With MPP

Average MPP decreases $0.91/cwt, margin < $8 most of time

Txt surveys on MPP-Dairy

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Cheese Futures for 2015 Tumbling Lower

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$1.45

$1.50

$1.55

$1.60

$1.65

$1.70

$1.75

$1.80

$1.85

$1.90

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2015

Sep '14 Oct '14 Nov '14 Dec '14

Skim Milk Powder Exports Prospects

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-$1.00

-$0.80

-$0.60

-$0.40

-$0.20

$0.00

$0.20

$0.40

$0.60

-150%

-100%

-50%

0%

50%

100%

150%

U.S. Skim Milk Powder Exports Growth

US - Oceania Skim Milk Powder Price Basis

Butter Stocks/Use (in Days of Consumption)

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0 days

10 days

20 days

30 days

40 days

50 days

60 days

70 days

80 days

Jan

Feb

Mar

Ap

rM

ay Jun

Jul

Au

gSe

pO

ctN

ov

Dec Jan

Feb

Mar

Ap

rM

ay Jun

Jul

Au

gSe

pO

ctN

ov

Dec

2013 2014

Actual 2005-2014 Average

Acknowledgements

33

Dairy Policy Reforms and Advanced Dairy Risk Management Strategies

VitaPlus Dairy Summit 2014

Red Wing, MN

December 10, 2014

Dr. Marin Bozic

mbozic@umn.edu

Department of Applied

Economics

University of Minnesota-Twin

Cities

317c Ruttan Hall

1994 Buford Avenue

St Paul, MN 55108

Photo Credits:

Mara at Blue Diamond Dairy

© Sadie Frericks, 2010