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

2. Major Dairy Provisions of the Agricultural Act of 2014 REPEALEDNEW  Milk Income Loss Contract  Dairy Product Price Support Program  Dairy Export Incentive Program  Margin Protection Program for Dairy Producers  Dairy Product Donation Program

3. No More Price Floors

4. MILC is no more.

5. 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

6. Margin Protection Program Essentials Actual Dairy Production Margin Production History Coverage Percentage Coverage Level

7. 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)

8. Actual Dairy Production Margin Average Margin over 2007-2014: $7.90

9. 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.

10. 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.

11. 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

12. MPP Indemnities Q: When does the MPP pay indemnities? Consecutive Two-Month Periods 2012 Two-month Average Coverage Level & Indemnities $4.00$6.50 January 7.57 February 5.826.700.00 March 4.94 April 4.264.600.001.90 May 3.41 June 3.513.440.563.06 July 2.74 August 2.982.861.143.64 September 5.51 October 7.286.390.000.14

13. MPP in Action: $4.00 Coverage Level

14. MPP in Action: $6.50 Coverage Level (Small Farms)

15. MPP in Action: $6.50 Coverage Level (Large Farms)

16. MILC vs MPP (@ $6.50) indemnities

17. MPP in Action: $8.00 Coverage Level (Small Farms)

18. MPP in Action: $8.00 Coverage Level (Large Farms)

19. 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

20. 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 $04,6722,9181,084 $4.50 $997,9724,5681,791 $5.00 $24811,2726,6112,555 $5.50 $39614,5729,0863,380 $6.00 $54518,50611,5614,491 $6.50 $89122,63114,3185,937 $7.00 $2,14826,75618,0097,525 $7.50 $2,97030,88122,1349,226 $8.00 $4,70335,04626,81111,290

21. Farm A: 50 Cows – Net Indemnities Premiums Catastrophic Milk Price (2009) Major Drought (2012) 2007-2013 Average $4.00 $04,6722,9181,084 $4.50 $997,8734,4691,692 $5.00 $24811,0246,3642,307 $5.50 $39614,1768,6902,984 $6.00 $54517,96211,0173,946 $6.50 $89121,74013,4275,046 $7.00 $2,14824,60815,8615,376 $7.50 $2,97027,91119,1646,256 $8.00 $4,70330,34322,1096,587

22. 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 0280,316175,06765,055 $4.50 11,480478,316274,067107,483 $5.00 23,160676,316396,661153,282 $5.50 57,000874,316545,161202,782 $6.00 88,0701,110,384693,661269,434 $6.50 164,2601,357,884859,065356,192 $7.00 468,5001,605,3841,080,570451,479 $7.50 599,2401,852,8841,328,070553,571 $8.00 772,4402,102,7351,608,677677,395

23. Farm B: 3000 Cows – Net Indemnities Premiums Catastrophic Milk Price (2009) Major Drought (2012) 2007-2013 Average $4.00 0 280,316175,067 65,055 $4.50 11,480 466,836262,587 96,003 $5.00 23,160 653,156373,501130,122 $5.50 57,000 817,316488,161145,782 $6.00 88,0701,022,314605,591181,364 $6.50 164,2601,193,624694,805191,932 $7.00 468,5001,136,884612,070 (17,021) $7.50 599,2401,253,644728,830 (45,669) $8.00 772,4401,330,295836,237 (95,045)

24. 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

25. Scenario 1: Expected Catastrophic Margins

26. Scenario 1: Expected Low Margins Premiums Expected Indemnity Net Indemnity $4.00 $0.00 $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

27. Scenario 2: Expected High Margins

28. Scenario: Expected High Margins Premiums Expected Indemnity Net Indemnity $4.00 $0.00 $0.01 $4.50 $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

29. 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.

30. 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).

31. MPP vs futures & options

32. 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).

33. Dairy Subtitle to the Agricultural Act of 2014: AEM3040 Spring 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: Title Slide: Orange Patch Dairy, Sleepy Eye, MN Credits Slide: Zweber Family Farms, Elko, MN