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Marin Bozic Midwest Dairy Expo St. Cloud, MN November 27-28, 2012

Marin Bozic Midwest Dairy Expo St. Cloud, MN November 27-28, 2012. Plan for today. Big changes I: What Goes Away Big changes II: What’s Coming Up Income over Feed Costs Margins Margin Insurance Stabilization Program. New federal dairy policy - timeline.

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Marin Bozic Midwest Dairy Expo St. Cloud, MN November 27-28, 2012

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  1. Marin Bozic Midwest Dairy Expo St. Cloud, MN November 27-28, 2012

  2. Plan for today • Big changes I: What Goes Away • Big changes II: What’s Coming Up • Income over Feed Costs Margins • Margin Insurance • Stabilization Program

  3. New federal dairy policy - timeline • September 2011: Rep. Peterson introduces Dairy Security Act of 2011 • May 2012: Senate passes S3240 (Senate version of Farm bill) • July 2012: House Ag. Committee passes HR 6083 (House version of Farm bill) • August 2012: The country goes crazy until elections are over • This week: Some movement finally?

  4. Discontinued programs • Dairy Products Price Support Program – as of December 31, 2012 • Milk Income Loss Contract (MILC) – gone as of October 1, 2012

  5. No more price floors – milk powder prices will integrate with the rest of the world

  6. MILC was a big help for small producers

  7. From Foundation for the Futureto 2012 Farm Bill

  8. Income over Feed Costs Margin • All-Milk ($/cwt) - 1.0728 x Corn ($/bu) - 0.0735 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

  9. Where does this formula come from?

  10. Where does this formula come from?

  11. Income over Feed Costs Margin: 2004-2012

  12. Subsidized margin insurance • Official name: Dairy Producer Margin Protection Program (PDMPP) • Two layers: • Basic Margin Protection – “Free” protection at $4.00 margin • Supplemental Margin Protection – Can buy up from $4.50 to $8.00 margin in 50 cents increments (called “Coverage Level”)

  13. Supplemental Margin ProtectionPremiums for the first 4mil lbs • Supplemental Margin Protection Premiums (annual):

  14. Supplemental Margin ProtectionPremiums for above 4mil lbs • Supplemental Margin Protection Premiums (annual):

  15. Basic Margin Protection

  16. Supplemental Margin Protection: $6.50 coverage level

  17. Supplemental Margin Protection: $8.00 coverage level

  18. Supplemental Margin Protection: $8.00 coverage level

  19. DPMPP: What triggers it exactly? • Calendar year is divided into consecutive two-month periods • Average margin must be below the purchased coverage level in order for indemnities to be due.

  20. DPMPP: What is the payment rate? • Basic Margin Protection • The difference between the actual margin and $4.00, except that, if the difference is more than $4.00, the Secretary shall use $4.00 • Example: Jerry subscribed for basic margin protection. For Jul-Aug, payment rate was $1.14 per cwt. If Jul-Aug margin was -$0.50, payment would have been $4.00 per cwt.

  21. DPMPP: What is the payment base? • Supplemental Margin Protection: • The difference between coverage level and the greater of actual margin and $4.00. Example: Jerry also subscribed for supplemental margin protection at $6.50 coverage level. For Jul-Aug, the payment rate on supplemental was $6.50- max($4.00, $2.86) = $2.50

  22. DPMPP: What is the payment base? • Basic Production History • Used in Basic Margin Protection • Equal to the highest annual milk marketings in any 1 of the 3 calendar years immediately preceding the calendar year in which the participating dairy signed up • Annual Production History: • Used in Supplemental Margin Protection • Equal to the actual milk marketings of the participating dairy during the preceding calendar year

  23. DPMPP: What is the actual payment base? • Basic Margin Protection: Actual DPMPP base used for indemnity is the lesser of • 80 percent of the basic production history, divided by 6 • Actual quantity of milk marketed during the consecutive 2-month period

  24. DPMPP: What is the actual payment base? Supplemental Margin Protection: • Coverage Percentage must be chosen by producer: not less than 25 percent, nor more than 90 percent of annual production history • Actual DPMPP base used for indemnity is chosen coverage percentage times the lesser of • Annual production history divided by 6 • Actual quantity of milk marketed during the consecutive 2-month period

  25. DPMPP payment base - example Jerry has a farm with 150 milking cows, with rolling herd average of 21,000 lbs. His annual milk marketings were: 2009: 3,140,146 lbs 2010: 3,142,638 lbs 2011: 3,130,758 lbs • His basic production history is 3,142,638 lbs. His annual production history is 3,130,758 lbs.

  26. DPMPP payment base - example • In July-August period, milk production on his farm was 528,229lbs. • Basic Margin Protection actual base: Min(0.8x3,142,638/6, 528,229) = min(419,018; 528,229) = 419,018. • Supplemental Margin Protection actual base (with coverage percentage of 90 percent) 0.9 x min(3,130,758/6, 528,229) = 0.9 x min (521,793, 528,229)= 469,613

  27. DPMPP – putting it all together • For July-August period, Jerry would get: Basic Margin Protection: $1.14/cwt x 4,190 cwt = $4,476 Supplemental Margin Protection (@$6.50 coverage level): $2.50 x 4,696 cwt = 11,740 Total = $16,216 Effective indemnity per cwt marketed: $3.07/cwt

  28. DPMPP – how much does it cost? • Entry fee (annual): • Premiums for supplemental margin protection…

  29. Dairy Market Stabilization Program Trigger: • Actual margins of $6.00 or less for each of the immediately preceding two months • Actual margin of $4.00 or less for the immediately preceding month

  30. DMSP – What is the stabilization base? • Volume of average milk marketings for the three months immediately preceding the announcement that the stabilization program is activated OR • Volume of monthly milk marketings for the same month in the preceding year as the month in which DMSP is declared active

  31. DMSP – what is the “penalty”? • Producer is not going to be paid for more than the greater of… • 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

  32. Expected returns in 2013 for 150 cow operation

  33. Expected returns in 2013 for 150 cow operation (per cwt)

  34. Expected returns in 2013 for 150 cow operation ($ per cow)

  35. Expected returns in 2013 for 1000 cow operation

  36. Expected returns in 2013 for 1000 cow operation ($ per cow)

  37. The Bottom Line • New dairy policy will be based on subsidized margin insurance, likely complemented with market stabilization program • Premiums for DPMPP are fixed, and heavily subsidized. It makes economic sense to consider participating in these programs.

  38. 2012 Farm Bill presented at the Midwest Dairy Expo St Cloud, MN, November 27, 2012 Dr. Marin Bozic mbozic@umn.edu Department of Applied Economics University of Minnesota-Twin Cities 317c Ruttan Hall 1994 Buford Avenue St Paul, MN 55108 You may download this presentation at http://marinbozic.info/

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