Farm Bill/Dairy Policy February 26, 2014 Dairy Gross Margin, LLC Dr. Scott Brown Agricultural Markets and Policy Division of Applied Social Sciences

The Long Road To A Farm Bill Ends August 2011 August The Budget Control Act of 2011 was passed. April 26, 2012April 26, The Senate Agriculture Committee passes a Farm Bill. June 21, 2012June 21, The Senate passes a Farm Bill. July 12, 2012July 12, The House Agriculture Committee passes a Farm Bill. December 31, 2012December 31, The Farm Bill is Extended for One Year. May 14, 2013May 14, The Senate Agriculture Committee passes a Farm Bill. May 15, 2013May 15, The House Agriculture Committee passes a Farm Bill. June 10, 2013June 10, The Senate passes a Farm Bill. June 20, 2013June 20, The Farm Bill fails on the House floor. July 11, 2013July 11, The House passes a “Farm Only” Farm Bill. September 19, 2013September 19, The House passes a nutrition bill. January 29, 2014January 29, The House passes a Farm Bill conference report. February 3, 2014February 3, The Senate passes a cloture motion on the Farm Bill conference report. February 4, 2014February 4, The Senate passes the Farm Bill conference report. February 7, 2014February 7, President Obama signs the Farm Bill conference report. Source: Modified from farmpolicy.com

A Fundamental Change In Dairy Policy  New farm bill dairy provisions give a new level of flexibility for dairy producers  Program flexibility requires additional homework for producers to optimize their participation in the program  MILC gives way to new program flexibility  No production caps  Coverage quantity and margin level has flexibility  Pay particular attention to the final language  Dairy policy evolved in the last few weeks  Some important changes relative to earlier versions

USDA Rulemaking Will Be Critical The exact operation of the new farm bill depends on USDA interpretation of the legislative language.

Major Dairy Provisions in AA2014  Creates a margin protection program  Creates a dairy product donation program  Repeals the MILC program after the margin protection program is operational  Repeals the dairy product price support program  Repeals the dairy export incentive program  Extends the dairy forward pricing program

When Will The Margin Program Begin?  USDA must begin the program no later than September 1, 2014  Difficult for USDA to start earlier than that date  Suggests signup will have to occur in the July/August timeframe  Begin your selection process now as signup will likely be up against the deadline  $100 registration fee gets $4.00 margin coverage  Margin payments will occur on a bimonthly basis beginning with January/February

National Program Margin Calculation  All Milk Price less Feed Cost  The average cost of feed for a dairy operation required to produce a Cwt. of milk, determined in accordance with the following formula: [ x price of corn/bu.] + [ x price of soybean meal/ton] + [ x price of alfalfa hay/ton].  Milk, corn and alfalfa prices reported in Agricultural Prices; soybean meal price is Central Illinois, USDA/AMS  The calculation required by this subsection shall be made as soon as practicable using the full-month price of the applicable reference month.  A lag in information, the January all milk price released at the end of February  It will take USDA time to process payments

Feed Costs From NMPF’s Original Work With One Modification

Historical Monthly U.S. Margin

Hoard’s Webinar – Percentage of Producer Participation

Producers Should Calculate Their Own Margin  It is important to know how your margin changes over time relative to the national margin  The higher the correlation between a producer’s margin and the national margin the better the safety net  I have heard, “I am not participating because my margin is different than the national margin.”  My response, “The level doesn’t matter as much as the month to month movements. Are you sure about participation?”  Take the time to do the comparison!  Change the mentality to insurance versus program maximization

Producers Will Be Assigned A Production History  Highest annual milk marketings during 2011, 2012 or  USDA will adjust production history annually to reflect an increase in U.S. milk production  An operation’s marketings growth does not matter in the adjustment to production history  New dairy operations  Volume of actual milk marketings extrapolated to a yearly amount  Estimated from herd size

A 2 Million Pound Production History Producer And Annual U.S. Milk Production Grows by 2% Annually

Higher Premiums At Higher Margin Coverage Levels

Hoard’s Webinar – Best Margin Level

Compare The Added Cost For Each $0.50 Of Additional Margin Protection $0.54 increase in premium For $0.50 more margin coverage

Selection of Coverage Percentage  A producer can choose to cover 25 to 90 percent of their production history in 5 percent increments annually  Creates interesting tradeoffs between coverage level and coverage quantity  If you expect low margins, high coverage level and quantity  If you expect high margins Reduce coverage level Reduce coverage quantity Reduce both Reduce neither

Hoard’s Webinar – Annual Adjustment

How Much Risk Can Your Operation Afford? $4.00 $8.00 $ % 90%60% Greater Protection at a greater cost Coverage Quantity Coverage Level

Dairy Product Donation Program  Must be operational no later than 120 days after the margin program begins  When the margin is less than $4.00 for the two preceding months, this feature becomes operational  Secretary purchases dairy products at prevailing market prices and distributes to public and private nonprofits assisting low- income households  This program suspended:  After three months of operation  Margins move above $4.00  Margins between $3.00 and $4.00 AND U.S. prices exceed world prices by more than 5%  Margins less than $3.00 AND U.S. prices exceed world prices by more than 7%

Hoard’s Webinar – Dairy Product Donation Program Large Purchases

USDA Regulations Will Clarify Program Operation  Do I get payments on production history even if I don’t produce that amount?  Premium rates for those over 4 million pounds of production history  There will be other USDA interpretations that will make a difference

Summary  Do not forget that how other producers choose to participate should affect your choice  Large participation means low margins remain longer  Small participation means many producers see full market effects of low margins  This is a large change in dairy policy  Spend time thinking how your operation should participate  If your operation can not afford risk increase coverage  Each operation is unique