What You Need to Know about MPP-Dairy

1. What You Need to Know about MPP-Dairy Kenny Burdine UK Ag Economics

2. 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

3. 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

4. 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

5. 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)

6. 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

7. What moves the margin the most?

8. 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

9. 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

10. Margin Program Premiums *Premium discounted by 25% for calendar years 2014 and 2015, excluding $8 level

11. 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

12. 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

13. What have these margins looked like in recent years?

14. Calculated Actual Margin(Jan 2009 to May 2014)

15. Calculated Actual Margin(Jan 2009 to May 2014)

16. Calculated Actual Margin(Jan 2009 to May 2014)

17. Calculated Actual Margin(Jan 2009 to May 2014)

18. 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

19. 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?

20. 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

21. 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)

22. Margin Program Premiums *Premium discounted by 25% for calendar years 2014 and 2015, excluding $8 level

23. 4 months of hypothetical margins…

24. 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

25. When is Sign up?

26. 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?

27. 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

28. Contact Information Kenny Burdine UK Agricultural Economics (859) 257-7273 kburdine@uky.edu