farm bill dairy programs: national politics and individual decisions dr. marin bozic dairy business...
DESCRIPTION
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 hayTRANSCRIPT
Farm Bill Dairy Programs: National Politics and Individual Decisions
Dr. Marin Bozic
Dairy Business Milk Marketing CooperativeMadison, WI, December 2, 2013
OLD POLICY NEW PROBLEM NEW SOLUTION
Focuses on Milk Price • Many 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)- 1.0728 x Corn (/bu)- 0.00735 x Soybean meal (/ton)- 0.0137 x Alfalfa hay (/ton)
• Feed ration per cwt of milk: • 30 pounds of shell corn, • 106.4 pounds of corn silage, • 14.7 pounds of soybean meal• 27.4 lbs of alfalfa hay
Farm Bill Dairy Margin 2000-2013
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
$0.00$2.00$4.00$6.00$8.00
$10.00$12.00$14.00$16.00
Farm bill Dairy MarginCoverage Level
Senate House
<4mil 4mil+ <4mil 4mil lbs+
4.00 0.00 0.00 0.00 0.03 4.50 0.01 0.02 0.01 0.045 5.00 0.02 0.04 0.02 0.066 5.50 0.035 0.10 0.035 0.11 6.00 0.045 0.15 0.045 0.185 6.50 0.09 0.29 0.09 0.29 7.00 0.40 0.62 0.18 0.38 7.50 0.60 0.83 0.60 0.83 8.00 0.95 1.06 0.95 1.06
What does $4.00/cwt IOFC Margin Look Like?
Jan-00
Sep-00
May-01Jan-02
Sep-02
May-03Jan-04
Sep-04
May-05Jan-06
Sep-06
May-07Jan-08
Sep-08
May-09Jan-10
Sep-10
May-11Jan-12
Sep-12
May-13
$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
$16.00
What does $6.50/cwt IOFC Margin Look Like?
Jan-00
Sep-00
May-01Jan-02
Sep-02
May-03Jan-04
Sep-04
May-05Jan-06
Sep-06
May-07Jan-08
Sep-08
May-09Jan-10
Sep-10
May-11Jan-12
Sep-12
May-13
$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
$16.00
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 2012Two-month
Average
January 7.57February 5.82 6.70
March 4.94April 4.26 4.60May 3.41June 3.51 3.44July 2.74
August 2.98 2.86September 5.51
October 7.28 6.39
• 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
Year 1: Information Set
Bas
ed o
n N
ewto
n (2
013)
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
Bas
ed o
n N
ewto
n (2
013)
Year 2: Information Set
Year 2: Information Set
Bas
ed o
n N
ewto
n (2
013)
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 $1.28
Bas
ed o
n N
ewto
n (2
013)
How Subsidized is Margin Insurance?
Coverage 2007-2013 Average Expected
Subsides
2009 Expected Subsidies
($) As Percent of Average
Margin
150 Cows
3,000 Cows
150 Cows
3,000 Cows
$4.50 55% 64% 28% 93% 86%$5.00 61% 74% 48% 94% 88%$5.50 67% 76% 30% 94% 83%$6.00 73% 81% 36% 95% 83%$6.50 79% 75% 18% 93% 76%$7.00 85% 22% -21% 74% 60%$7.50 91% 15% -18% 69% 57%$8.00 97% -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
Varia
ble
Cost
sFi
xed
Cost
s
Milk
Pric
e
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
-9%-7%-5%-3%-1%1%3%5%7%
USA Year-on-Year Milk Production Growth 2008-2013
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-$5.00• 97 percent of stabilization base• 93 percent of the marketings of milk
– If margins were less than $4.00• 96 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?
-6.00% -4.00% -2.00% 0.00% 2.00% 4.00% 6.00%$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
$16.00
Yield Growth: Wisconsin minus National
Farm
Bill
Dai
ry IO
FC
Mar
gin
IOFC Margin Volatility: Threat or an Opportunity?
1 21 41 61 81101
121141
161181
201221
241261
281301
321341
361381
4010
5
10
15
20
25
IOFC Margins Feed Prices All-Milk Prices
U.S
Dai
ry IO
FC M
argi
n, /
cwt
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 CooperativeDecember 2, 2013
Dr. Marin [email protected] of Applied EconomicsUniversity of Minnesota-Twin Cities317c Ruttan Hall1994 Buford AvenueSt Paul, MN 55108
http://marinbozic.info