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2013 Farm Bill: What does it mean for Dairy Lenders?. Dr. Marin Bozic University of Minnesota Agriculture Credit Association Conference October 24, 2013 Saint Paul, MN. Agenda. Is there a case for dairy safety net? Nuts and bolts of proposed new programs
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2013 Farm Bill: What does it mean for Dairy Lenders? Dr. Marin Bozic University of Minnesota Agriculture Credit Association Conference October 24, 2013 Saint Paul, MN
Agenda • Is there a case for dairy safety net? • Nuts and bolts of proposed new programs • What are the implications for ag lenders? • The Bottom Line.
Competing Dairy Policy Proposals • Two alternatives: • Senate Bill No. 954 “Dairy Security Act” • House Bill. 2642 • “Goodlatte-Scott Amendment”
No more price floors – milk powder prices will integrate with the rest of the world
Income over Feed Costs 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
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”)
Supplemental Margin Protection: $6.50 Coverage Level
Supplemental Margin Protection: $8.00 Coverage Level
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.
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.
DPMPP: What is the payment rate? • 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
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 • 80% of BPH is covered. • Annual Production History: • Used in Supplemental Margin Protection • Equal to the actual milk marketings of the participating dairy during the preceding calendar year • 25-90% of APH can be insured
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
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
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
Designing dairy safety net • Agreement: • Price floors should be abolished. • Instead of milk price, focus should be on profit margins. • Producers should not be asked to make long-term insurance commitments. • Disagreement: • Supply management of some form is an essential policy pillar.
Pro and contra supply management • Why it might be a good idea: • It could reduce government costs, accelerate margin recovery in low-margin states of the world. • Does not present a long-term obstacle for milk production growth, even for farms with aggressive growth plans • Why it might not be such a good idea: • Unquantifiable unknowns. It could end up being just an ineffective nuisance.
Estimating expected effects using market information All-milk price CME Corn Futures & Options CME Class III Milk Futures & Options NASS Corn Price CME Class IV Milk Futures & Options AMS Soybean Meal Price CMESoybean Meal Futures & Options NASS Alfalfa Hay Price Historical correlations
A Numerical Example 2013 Expected production: 91,618 cwt Happy IOFC margin: $8.00/cwt Happy IOFC revenue: $732,944 Basic Production History: 89,821 cwt Annual Production History: 89,821 cwt Bad memories: 2009 IOFC margin: $4.52 2012 IOFC margin: $5.31
What would $6.50 coverage level mean under different margin scenariosif we get DSA
What would $6.50 coverage level mean under different margin scenariosif we get DSA
What would $6.50 coverage level mean under different margin scenariosif we get G-S
Expected impacts of DSA on a 360 cow farm in 2013 (based on information on Jan 15)
Expected impacts of G-S on a 360 cow farm in 2013 (based on information on Jan 15)
Let’s play a game… Imagine that it is January 15, 2008. Dairy Security Act has just become a law. You are the owner of ‘North Star Dairy’ a fictional large dairy operation in Minnesota that had grown to about 2000 cows at the end of 2012. You have made a decision to participate in the DPMPP/DMSP in 2008. Let’s see how did the program work for you over 2008-2012 period.
Please take a look at this device… (forget everything from 2008+)
Subsidies are embedded in timing, not primarily premium levels
What else do we (think we) know about the new programs? • Under the Milk Income Loss Contract program (MILC), farms with less than 100 cows (76% of farms; 18% of milk production) account for 42% of net payments and farms over 1000 cows (2% of farms; 42% of milk production) account for 6% of net payments. • Under the new policy regime farms with fewer than 100 cows will get 17-21% of net program benefits, and farms over 1000 cows will get 36-43% of benefits.
