what you need to know about mpp-dairy
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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 - PowerPoint PPT PresentationTRANSCRIPT
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What You Need to Know about MPP-Dairy
Kenny BurdineUK Ag Economics
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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
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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
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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
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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:– 1.0728 x corn price per bushel (ag prices)– 0.00735 x SBM price per ton (Market news, IL)– 0.0137 x alfalfa hay price per ton (ag prices)
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August 2014 Margin
• A current actual margin calculation would look like…
US All Milk $23.70-Corn @ $3.70 x 1.0728 -$3.97-SBM @ $432 x 0.00735 -$3.18-Alfalfa @ $209 x 0.0137 -$2.86
Actual Margin $13.69
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What moves the margin the most?Factor Aug Price 10%
ChangeImpact on Margin
All Milk $23.70 $2.37 $2.37
Corn $3.70 $0.37 $0.40
SBM $432 $43.20 $0.32
Alfalfa Hay
$209 $20.90 $0.29
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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
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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
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Margin Program PremiumsCoverage Level Premium per CWT*
(First 4M lbs)Premium per CWT(After 4M lbs)
$4.00 None None
$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
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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
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More on Production Histories
• Based on highest marketings from 2011-2013– 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
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What have these margins looked like in recent years?
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Calculated Actual Margin(Jan 2009 to May 2014)
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Calculated Actual Margin(Jan 2009 to May 2014)
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Calculated Actual Margin(Jan 2009 to May 2014)
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Calculated Actual Margin(Jan 2009 to May 2014)
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Margins over last 5 years
• From 2009-2013, margin was…– Below $4 – 17% of months– Below $6 – 37% of months– Below $8 - 63% of months
• Average margin was $6.83
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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?
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Preliminary Research(ongoing with Dr. Tyler Mark)
• Historical margin analysis (2002-2013)– 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
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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 = $0.04125 per cwt
• Annual premium $495 ($0.04125 x 12,000)
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Margin Program PremiumsCoverage Level Premium per CWT*
(First 4M lbs)Premium per CWT(After 4M lbs)
$4.00 None None
$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
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4 months of hypothetical margins…
January February March April
Actual Margin
$7.40 $6.80 $5.80 $4.90
Couplet Margin
$7.10 $5.35
Payment per cwt covered
None $0.65
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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
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When is Sign up?Coverage Year Registration Period
2014 / 2015 Sept 2– Nov 28, 2014
2016 July 1 – Sept 30, 2015
2017 July 1 – Sept 30, 2016
2018 July 1 – Sept 30, 2017
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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?
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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