Marin Bozic University of Minnesota – Twin Cities Guest Lectures for Cornell University - AEM3040
Dairy Subtitle to the Agricultural Act of 2014 Dr . Marin Bozic
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Dairy Subtitle to the Agricultural Act of 2014 Dr. Marin Bozic
description
Dairy Subtitle to the Agricultural Act of 2014 Dr . Marin Bozic. Major Dairy Provisions of the Agricultural Act of 2014. REPEALED. NEW. Milk Income Loss Contract Dairy Product Price Support Program Dairy Export Incentive Program. Margin Protection Program for Dairy Producers - PowerPoint PPT Presentation
Transcript of Dairy Subtitle to the Agricultural Act of 2014 Dr . Marin Bozic
Dairy Subtitle to the Agricultural Act of 2014Dr. Marin Bozic
Major Dairy Provisions of the Agricultural Act of 2014
REPEALED NEW
Milk Income Loss Contract
Dairy Product Price Support Program
Dairy Export Incentive Program
Margin Protection Program for Dairy Producers
Dairy Product Donation Program
No More Price Floors
19981999
20002001
20022003
20042005
20062007
20082009
20102011
20122013
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
Europe Oceania USA
MILC is no more.
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
Margin Protection Program for Dairy Producers
Key features:• Voluntary program, with no supply management or any direct
disincentives for growth in low-margin periods.
• Protects dairymen from severe downturns in the milk price, rising livestock feed prices, or a combination of both.
• Does not impose production or gross income eligibility caps
• Very simple and hassle-free
Margin Protection Program Essentials
Actual Dairy Production MarginProduction History
Coverage PercentageCoverage Level
Actual Dairy Production Margin
Q: What margin does this margin insurance protect?
• All-milk price minus feed ration value• Single, national formula, cannot be customized
Actual Dairy Production Margin = U.S. All-Milk Price
- 1.0728 x NASS Corn Price ($/bu)- 0.00735 x AMS Soybean Meal (Central IL) ($/ton)- 0.0137 x NASS Alfalfa Hay ($/ton)
Actual Dairy Production Margin
2007
2008
2009
2010
2011
2012
2013
2014
0.002.004.006.008.00
10.0012.0014.0016.00
Average Margin over 2007-2014: $7.90
Production History & Coverage Percentage
Q: How Much Milk Can I Insure?
Unlike old dairy safety net based on MILC, there are no categorical limits to size of the farm. You can insure up to 90% of your production history, which is the highest of your milk marketings in 2011, 2012, and 2013.
Each year, your production history willincrease based on national growth inmilk yield per cow.
Each year, you may choose coverage percentage of 25% to 90% of your production history, in 5% increments.
Treatment of Producers with Multiple Dairy Operations
Q: What if I have two or more dairies?
A: Each dairy is treated as a separate program participant. You can choose to enroll some, all, or none of your dairies.
While you cannot insure growth on your existing dairies, if you build a brand new facility, it seems likely you will be able to enroll it.
Beware! It is forbidden to ‘reconstitute’your business so as to profit more fromDairy the farm bill programs.
MPP Coverage Levels and Premiums
Premium ≤ 4mil lbs PH
($/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 2012Two-month
Average
Coverage Level & Indemnities
$4.00 $6.50
January 7.57February 5.82 6.70 0.00 0.00
March 4.94April 4.26 4.60 0.00 1.90May 3.41June 3.51 3.44 0.56 3.06July 2.74
August 2.98 2.86 1.14 3.64September 5.51
October 7.28 6.39 0.00 0.14
MPP in Action: $4.00 Coverage Level
2007
2008
2009
2010
2011
2012
2013
2014
0.002.004.006.008.00
10.0012.0014.0016.00
2007
2008
2009
2010
2011
2012
2013
2014
0.002.004.006.008.00
10.0012.0014.0016.00
MPP in Action: $6.50 Coverage Level (Small Farms)
2007
2008
2009
2010
2011
2012
2013
2014
0.002.004.006.008.00
10.0012.0014.0016.00
MPP in Action: $6.50 Coverage Level (Large Farms)
MILC vs MPP (@ $6.50) indemnities
Jan-
Feb
Mar
-Apr
May
-Jun
Jul-A
ugSe
p-Oc
tNo
v-De
cJa
n-Fe
bM
ar-A
prM
ay-Ju
nJu
l-Aug
Sep-
Oct
Nov-
Dec
Jan-
Feb
Mar
-Apr
May
-Jun
Jul-A
ugSe
p-Oc
tNo
v-De
cJa
n-Fe
bM
ar-A
prM
ay-Ju
nJu
l-Aug
Sep-
Oct
Nov-
Dec
Jan-
Feb
Mar
-Apr
May
-Jun
Jul-A
ugSe
p-Oc
tNo
v-De
c
2009 2010 2011 2012 2013
$0.00$1.00$2.00$3.00$4.00$5.00
MILC MPP
MPP in Action: $8.00 Coverage Level (Small Farms)
2007
2008
2009
2010
2011
2012
2013
2014
0.002.004.006.008.00
10.0012.0014.0016.00
2007
2008
2009
2010
2011
2012
2013
2014
0.002.004.006.008.00
10.0012.0014.0016.00
MPP in Action: $8.00 Coverage Level (Large Farms)
Friendly to Dairies of All Sizes
Farm A. 50 CowsProduction History: 1,100,000 lbs
Farm B.3000 CowsProduction History: 66,000,000 lbs
Farm A: 50 Cows, PH = 1.1 Mil Lbs, 90% Coverage Pct
Premiums Catastrophic Milk
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
Premiums Catastrophic Milk
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
Premiums Catastrophic Milk
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
Premiums Catastrophic Milk
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 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.
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.
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, try to lock 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).
Dairy Subtitle to the Agricultural Act of 2014:
AEM3040 Spring 2014
Dr. Marin [email protected] of Applied EconomicsUniversity of Minnesota-Twin Cities317c Ruttan Hall1994 Buford AvenueSt Paul, MN 55108
Photo Credits:Title Slide: Orange Patch Dairy, Sleepy Eye, MNCredits Slide: Zweber Family Farms, Elko, MN
