What You Need to Know about MPP-Dairy Kenny Burdine UK Ag Economics

Outline for Discussion Basic nuts and bolts of the program – Signup, rules, how it works Historical perspective of margins offered – Last 5 years, implications, preliminary research Framing the decision for producers Quick scenario

Margin Protection for Dairy Producers (MPP-Dairy) New program authorized in 2014 farm bill – Subtitle D, section 1401 – 1410 – Regulations came out in late August Repeals the MILC program when it becomes effective – MILC - Payment on portion of milk when Boston Class I price is under $16.94 Ends Dairy Export Incentive Program – Subsidy to encourage exports Established Dairy Product Donation Program – Dairy products purchased and donated at low margin times

Margin Protection for Dairy Producers (MPP-Dairy) Authorizes new margin program effective through through Dec 31, 2018 Can not participate in Dairy-MPP and Dairy- LGM – Once in Dairy-MPP, in through 2018 Designed to ensure a margin – milk price minus feed costs

What is the Relevant Margin? Actual Margin = Milk price minus average feed cost index Offers opportunity to establish minimum “actual” margin level Milk price – US All Milk Price Average feed cost calculation is sum of: – x corn price per bushel (ag prices) – x SBM price per ton (Market news, IL) – x alfalfa hay price per ton (ag prices)

August 2014 Margin A current actual margin calculation would look like… US All Milk $23.70 $3.70 x $3.97 $432 x $3.18 $209 x $2.86 Actual Margin$13.69

What moves the margin the most? FactorAug Price10% Change Impact on Margin All Milk$23.70$2.37 Corn$3.70$0.37$0.40 SBM$432$43.20$0.32 Alfalfa Hay $209$20.90$0.29

When is a Payment Made? Payment is made when the actual margin is below coverage level over a 2 month period The 2 month periods are couplets – Jan-Feb, Mar-April, May-June, July-Aug, Sept-Oct, Nov-Dec – Ie: Jan-Feb average must trigger payment

What is Participation Cost? $100 annual administrative fee No premium for $4 coverage level Higher coverage levels can be purchased for additional premium Premiums go up after the first 4,000,000 lbs of coverage – Roughly 200 cow, 20K RHA

Margin Program Premiums Coverage LevelPremium per CWT* (First 4M lbs) Premium per CWT (After 4M lbs) $4.00None $4.50$0.010$0.020 $5.00$0.025$0.040 $5.50$0.040$0.100 $6.00$0.055$0.155 $6.50$0.090$0.290 $7.00$0.217$0.830 $7.50$0.300$1.060 $8.00$0.475$1.360 *Premium discounted by 25% for calendar years 2014 and 2015, excluding $8 level

How Much Production Can be Covered? Production history – highest annual milk marketings during 2011, 2012, or 2013 – Provisions for adjustment by secretary based on annual milk production Participating dairy may cover 25% - 90% of production history in 5% increments NOTE: Both coverage level threshold and coverage percentage are annual decision – Levels can be adjusted based on market conditions

More on Production Histories Based on highest marketings from – Does not roll Establishment for new dairies (less than 1 year) – Extrapolate from existing months – Estimate based on herd size Production history is for operation, not producer – Single producer can have multiple operations and production histories

What have these margins looked like in recent years?

Calculated Actual Margin (Jan 2009 to May 2014)

Margins over last 5 years From , margin was… – Below $4 – 17% of months – Below $6 – 37% of months – Below $8 - 63% of months Average margin was $6.83

History as an Indicator of Payout Historical margins have zero effect on future payouts – Still useful to show producers, but not sufficient Current margins suggest that all margins offered are well “out of the money” Many have called MPP-Dairy a “catastrophic risk” management tool What would current projections, with risk assumptions, suggest about payouts?

Preliminary Research (ongoing with Dr. Tyler Mark) Historical margin analysis ( ) – Payments exceed premiums – Increased average margin in all regions – Downside margin risk reduced in each region Simulation using USDA baseline forecasts – Current forecasts – payouts expected rarely – Very sensitive to milk price changes (10%, 20%) – Moderately sensitive to feed price changes

A Quick Scenario 100 cow dairy operation has production history of 2 million lbs They choose 60% coverage at $6 per cwt level This is 1.2 M lbs or 12,000 cwt They are under 4 M, so pay lower premium – Also discounted 25% this first time – Premium $0.055 x.75 = $ per cwt Annual premium $495 ($ x 12,000)

Margin Program Premiums Coverage LevelPremium per CWT* (First 4M lbs) Premium per CWT (After 4M lbs) $4.00None $4.50$0.010$0.020 $5.00$0.025$0.040 $5.50$0.040$0.100 $6.00$0.055$0.155 $6.50$0.090$0.290 $7.00$0.217$0.830 $7.50$0.300$1.060 $8.00$0.475$1.360 *Premium discounted by 25% for calendar years 2014 and 2015, excluding $8 level

4 months of hypothetical margins… JanuaryFebruaryMarchApril Actual Margin $7.40$6.80$5.80$4.90 Couplet Margin $7.10$5.35 Payment per cwt covered None$0.65

Payment Received No payment is made on Jan-Feb A $0.65 / cwt payment is made on Mar-April 2 months is 1/6 of covered production 1/6 of 12,000 cwt or 2,000 cwt Payment = 2,000 x 0.65 = $1,300 Calculation / payments continue for next 8 months

When is Sign up? Coverage YearRegistration Period 2014 / 2015Sept 2– Nov 28, July 1 – Sept 30, July 1 – Sept 30, July 1 – Sept 30, 2017

Producers Need to Know Much like a bundled option through 2018 at a flat premium – Current margin is only a consideration – No payment means margin is higher Coverage levels and percent coverage can be changed each year – Be strategic about coverage levels – Could be offered a guaranteed payment Distinction between DPMPP and LGM-Dairy – Opportunity for strategic switching?

Summary Program is becoming effective during very high margin time MPP-Dairy premiums and margins are fixed for the life of the bill – MPP-Dairy is a 4+ year program – LGM Dairy premiums and margins will evolve with Market MPP- Dairy - $100 fee offers cheap, catastrophic level protection – If you only take the $4 level, insure max* – Higher coverage levels are worth consideration, especially at smaller scale premium levels and as market changes Administration and signup through FSA – I think this program warrants consideration

Contact Information Kenny Burdine UK Agricultural Economics (859)