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Dr. Marin Bozic Iowa State Dairy Association Annual Meeting Waverly, IA Jan 16, 2013

2013 Dairy Outlook. Dr. Marin Bozic Iowa State Dairy Association Annual Meeting Waverly, IA Jan 16, 2013. The story of milk prices. El Niño: rain in USA, drought in NZ. La Niña: Dryness in USA, rains in NZ. The Kiwi Cycle (Change in Per Cow Milk Yield).

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Dr. Marin Bozic Iowa State Dairy Association Annual Meeting Waverly, IA Jan 16, 2013

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  1. 2013 Dairy Outlook Dr. Marin Bozic Iowa State Dairy Association Annual Meeting Waverly, IA Jan 16, 2013

  2. The story of milk prices

  3. El Niño: rain in USA, drought in NZ

  4. La Niña: Dryness in USA, rains in NZ

  5. The Kiwi Cycle(Change in Per Cow Milk Yield)

  6. The Kiwi Cycle(Change in Per Cow Milk Yield)

  7. U.S. Drought Monitor: Jan 8, 2013

  8. No drop, no crop.

  9. Hot Weather + High Grain Prices = Lower Milk Yields

  10. U.S. Dairy Herd Loses 75K cows

  11. Nov 2012: Year-on-Year Changes in Milk Production

  12. Owns land for forage Smaller Operation Higher Milk Price Lower variable costs, higher fixed costs Does not grow feed Large Operation Lower Milk Price High variable costs; low fixed costs Which Business Model Works Better? “Traditional” Dairy “Western-Style” Dairy

  13. Milk Production: Growing Again

  14. Dairy Products Inventory Overview

  15. Dairy Products Inventory Overview

  16. Dairy Products Inventory Overview

  17. Cheese Prices: US vs Oceania

  18. Short-term price dynamics

  19. 2013 Class III Prices & Uncertainty

  20. Corn - pick your number: $4 or $9

  21. Income Over Feed Cost in 2013

  22. Hedge Early, Hedge Often…

  23. Iowa Mailbox Prices 2009: $13.04 2010: $16.41 2011: $20.25 2012: $18.31 2013: $19.56

  24. Dairy Policy Outlook

  25. Expected MILC payments in 2013

  26. From Foundation for the Futureto 2013 Farm Bill

  27. 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

  28. Income over Feed Costs Margin: 2004-2012

  29. Subsidized margin insurance • Official name: Dairy Producer Margin Protection Program (PDMPP) • Two layers: • Basic Margin Protection – No-cost 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”)

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

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

  32. Basic Margin Protection

  33. Supplemental Margin Protection: $6.50 coverage level

  34. Supplemental Margin Protection: $8.00 coverage level

  35. 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.

  36. 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: Larry subscribed for basic margin protection. For Jul-Aug, payment rate was $1.14 per cwt.

  37. DPMPP: What is the payment base? • Supplemental Margin Protection: • The difference between coverage level and the greater of actual margin and $4.00. Example: Larry 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

  38. DPMPP: What is the payment base? • Basic Production History • Highest annual milk marketings in any 1 of the 3 calendar years before program sign-up • Used in Basic Margin Protection • Annual Production History: • Actual milk marketings of the participating dairy during the previous year • Used in Supplemental Margin Protection

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

  40. 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

  41. 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

  42. Expected returns in 2013 for 150 cow operation (as of 11/26/2012)

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

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

  45. Expected returns in 2013 for 1000 cow operation

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

  47. 2013 Dairy Outlook presented at the Iowa State Dairy Association annual meeting Waverly, MN January 16, 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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