Farm Bill Dairy Programs: National Politics and Individual Decisions Dr. Marin Bozic Dairy Business Milk Marketing Cooperative Madison, WI, December 2, 2013

OLD POLICYNEW PROBLEMNEW SOLUTION Focuses on Milk PriceMany dairies buy most of their feed. Feed prices very risky. Focuses on Income over Feed Costs (IOFC) Margin Countercyclical Payments Political Climate Favors Risk Management Introduces IOFC Margin Insurance Balances Markets Through Government Purchases Insurance without Controls would Lead to Milk Glut (?) Introduces Dairy Market Stabilization Program (Senate Bill Only) New Problems – New Solutions?

Farm Bill Dairy Margin All-Milk (/cwt) x Corn (/bu) x Soybean meal (/ton) x Alfalfa hay (/ton) Feed ration per cwt of milk: 30 pounds of shell corn, pounds of corn silage, 14.7 pounds of soybean meal 27.4 lbs of alfalfa hay

Farm Bill Dairy Margin

Farm bill Dairy Margin Coverage Level SenateHouse <4mil4mil+<4mil4mil lbs

What does $4.00/cwt IOFC Margin Look Like?

What does $6.50/cwt IOFC Margin Look Like?

Senate: Free $4.00: 80% of Milk Production Before Farm Bill (the highest of the last 3 years) $4.50-$8.00: Up to 90% of last year’s production House: Up to 80% of the highest annual production over the last 3 years. No Absolute Limits On Insurable Milk

Consecutive Two-Month Periods 2012 Two-month Average January7.57 February March4.94 April May3.41 June July2.74 August September5.51 October Calendar year is divided into six consecutive two- month periods Average margin must be below the purchased coverage level in order for indemnities to be due. When Will Margin Insurance Pay Out?

Year 1: Information Set

Based on Newton (2013)

Year 1: Expected Return at Enrollment Date Coverage Level Fees & Premiums Expected Indemnity Expected Net Revenue $4.00 $0.03 $0.01-$0.01 $4.50 $0.04 $0.02-$0.02 $5.00 $0.06 $0.04-$0.02 $5.50 $0.10 $0.06-$0.04 $6.00 $0.17 $0.10-$0.07 $6.50 $0.27 $0.15-$0.11 $7.00 $0.36 $0.23-$0.12 $7.50 $0.80 $0.34-$0.47 $8.00 $1.05 $0.47-$0.58 Based on Newton (2013)

Year 2: Information Set

Based on Newton (2013)

Year 2: Expected Return at Enrollment Date Coverage Level Fees & Premiums Expected Indemnity Expected Net Revenue $4.00 $0.03 $0.21$0.18 $4.50 $0.04 $0.35$0.31 $5.00 $0.06 $0.54$0.48 $5.50 $0.10 $0.78$0.67 $6.00 $0.17 $1.04$0.87 $6.50 $0.27 $1.33$1.07 $7.00 $0.36 $1.65$1.29 $7.50 $0.80 $1.98$1.18 $8.00 $1.05 $2.33$1.28 Based on Newton (2013)

How Subsidized is Margin Insurance? Coverage Average Expected Subsides 2009 Expected Subsidies ($)As Percent of Average Margin 150 Cows 3,000 Cows 150 Cows 3,000 Cows $4.5055%64%28%93%86% $5.0061%74%48%94%88% $5.5067%76%30%94%83% $6.0073%81%36%95%83% $6.5079%75%18%93%76% $7.0085%22%-21%74%60% $7.5091%15%-18%69%57% $8.0097%-1%-13%59%54% Based on Newton (2013)

How Subsidized is Margin Insurance? 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.

The Premise Behind the Stabilization Program Variable Costs Fixed Costs Milk Price Loss if you Continue to Produce Loss Is Bigger if you Reduce Production …but demand for dairy is “inelastic”. What that means is that if many producers cut back a little at the same time, milk prices will go up sufficiently to offset lost revenue.

Dairy Market Stabilization Program

Stabilization Base is not a Quota

What are the DMSP Penalties? –If margins were $5.00-$6.00: 98 percent of stabilization base 94 percent of the marketings of milk –If margins were $4.00-$ percent of stabilization base 93 percent of the marketings of milk –If margins were less than $ percent of stabilization base 92 percent of the marketings of milk

Exports and the Stabilization Program If Margins are $5.00-$6.00, DMSP will suspend if U.S. cheese price is higher than the world cheese price, or if the price in the United States for nonfat dry milk is equal to or greater than the world price of skim milk powder. If margins are $4.00-$5.00, DMSP will suspend if U.S. cheese price is more than 5% higher than the world cheese price… If margins are below $4.00, DMSP will suspend if U.S. cheese price is more than 7% higher than the world cheese price…

Will new policy change relative competitiveness of regions?

Are DMSP penalties equitable?

Yields vs. Margins – DMSP penalties equitable?

IOFC Margin Volatility: Threat or an Opportunity?

Change in Dairy Herd: CA vs WI

Subsidies and Mailbox vs All-Milk price

Sources and References Some of the quantitative results presented here are based on a research project led by Dr. Cameron S. Thraen and John C. Newton, the Ohio State University. Primary reference: Newton, John C. Policy Options for a Modern Dairy Economy, Ph.D. Dissertation, Copyright The Ohio State University 2013.

Farm Bill Dairy Programs: National Politics and Individual Decisions Dairy Business Milk Marketing Cooperative December 2, 2013 Dr. Marin Bozic Department of Applied Economics University of Minnesota-Twin Cities 317c Ruttan Hall 1994 Buford Avenue St Paul, MN