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Dairy Programs in the 2013 Farm Bill: LGM-Dairy - The Forgotten Third Pillar

Dairy Programs in the 2013 Farm Bill: LGM-Dairy - The Forgotten Third Pillar . Dr. Marin Bozic University of Minnesota Prepared for 4-State Dairy Nutrition & Management Conference June 13, 2013 Dubuque, IA. Our group…. John Newton Cameron Thraen Mark Stephenson Brian Gould Chris Wolf

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Dairy Programs in the 2013 Farm Bill: LGM-Dairy - The Forgotten Third Pillar

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  1. Dairy Programs in the 2013 Farm Bill: LGM-Dairy - The Forgotten Third Pillar Dr. Marin Bozic University of Minnesota Prepared for 4-State Dairy Nutrition & Management Conference June 13, 2013 Dubuque, IA

  2. Our group… • John Newton • Cameron Thraen • Mark Stephenson • Brian Gould • Chris Wolf • Marin Bozic • http://aede.osu.edu/dairybriefing

  3. Dairy Policy Timeline (hopefully) June 2013: Senate and House pass their versions of 2013 Farm Bill July-August 2013: Differences reconciled in Senate-House Conference Committee September 2013: Both chambers pass 2013 Farm bill. 2014: Dairies will have one-year to sign up for new programs.

  4. Dairy Policy Timeline Speaker Boehner: “I’ve got concerns about the farm bills, I told our members. But doing nothing means that we get no changes in the farm program, no changes in the nutrition program.  And as a result, I’m going to vote for the farm bill to make sure that the good work of the agriculture committee and whatever the floor might to do improve this bill, that it gets to a conference so that we can get the kind of changes that people want in our nutrition programs and our farm programs.” June 12, 2013

  5. New face of volatility: Income-over-feed-costs margin risk

  6. Three Pillars of New Federal Dairy Policy Dairy Producer Margin Protection Program (PDMPP) Dairy Market Stabilization Program (DMSP) Livestock Gross Margin Insurance for Dairy Cattle (LGM-Dairy)

  7. 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

  8. 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”)

  9. Basic Margin Protection

  10. Supplemental Margin Protection: $6.50 Coverage Level

  11. Supplemental Margin Protection: $8.00 Coverage Level

  12. Supplemental Margin Protection - Premiums

  13. 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.

  14. 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.

  15. 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

  16. Consider the example of a Five Flags Dairy 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

  17. What would $6.50 coverage level mean under different margin scenarios?

  18. What would $6.50 coverage level mean under different margin scenarios?

  19. Expected impacts of DPMPP on a 360 cow farm in 2013 (based on information on Jan 15)

  20. 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

  21. DMSP: Stabilization base calculation is flexible

  22. The Idea behind Dairy Market Stabilization Program: Small change in Q  large change in P S′ Price S D Quantity

  23. LGM-Dairy – The Forgotten Third Policy Pillar

  24. LGM-Dairy: Pricing method is out of date. It does not take into account milk-feed correlation. Farm Profile: 500 cows, 9,000 cwt produced/month. LGM-Dairy Policy Profile: 1/3 of anticipated milk marketings in each of 3 most distant insurable months since Jan 2008. $1.10 deductible. LGM assumed continuously available.

  25. LGM-Dairy: Lack of continuous availability is a major obstacle “Out of fear that the program would run out of funds, many bought more months together than they should have rather than stacking coverage. For our part, we had to back off of selling LGM until we know that the farmer can start with a strategy of stacking coverage and the money will be there to finish the strategy…” “I would prefer to make them three- or four-months contracts…But we didn't do that because we knew based on the available subsidy we would only have one shot at getting the grower insured.”

  26. 10-months contracts have a hidden cost – good margins may not be there when you come back! LGM-Dairy Policy Profile: 9,000 cwt produced/month. $1.10 deductible. LGM assumed continuously available.

  27. LGM-Dairy Needs to be Reformed • It should be offered continuously, independently of available budget for subsidies. • Pricing should reflect positive correlation of milk and feed futures. This can substantially reduce premiums for policies with high declared feed amounts. • Class IV milk should be included to reduce milk price basis. • More flexibility on feed equivalents – e.g. perhaps silage costs depend only on corn harvest futures price, not corn price at the later time milk is produced.

  28. DPMPP vs. LGM-Dairy? Genuinely flexible dairy policy would offer a choice of reformed, continuously offered LGM-Dairy with no-strings attached, and with much smaller subsidies than in DPMPP.

  29. Dairy Programs in the 2013 Farm Bill: LGM-Dairy - The Forgotten Third Pillar prepared for 4-state Dairy Nutrition & Management Conference Thursday, June 13, 2013 Dubuque, IA Dr. Marin Bozic mbozic@umn.edu Department of Applied Economics University of Minnesota-Twin Cities

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