Dairy Producer Margin Protection Program

1. Dairy Producer Margin Protection Program February 14, 2014 University of Wisconsin Webinar Series Dr. John Newton Clinical Assistant Professor, Department of ACE University of Illinois at Urbana-Champaign jcnewt@Illinois.edu @New10_AgEcon

2. Major Dairy Provisions of 2014 Farm Bill • Creates a Dairy Producer Margin Protection Program • Creates a dairy product donation program • Repeals the MILC program after the margin protection program is operational • Repeals the dairy product price support program • Repeals the dairy export incentive program • Extends the dairy forward pricing program

3. Margin Protection Program • Dairy Producer Margin Protection Program • Voluntary program with annual coverage decision • Protects dairymen from severe downturns in the milk price, rising livestock feed prices, or a combination of both. • Pays indemnity when the average difference between the USDA national All-Milk price and a feed ration index falls below a user selected coverage level

4. Important Margin Elements • Actual Dairy Production Margin • All-milk price minus feed ration value • Actual Dairy Production History • Maximum calendar year production 2011-2013 (revised annually) • Coverage Percentage • 25% to 90% in 5% increments • Coverage Level • $4.00/cwt to $8.00/cwt in 50¢ increments

5. Determine Appetite for Risk $8.00 Greater Protection at a greater cost Coverage Level $6.00 $4.00 60% 90% 25% Coverage Quantity Graphic from Hoard’s Dairyman Webinar by Dr. Scott Brown, University of Missouri

6. Protects Against Margin Declines 2014 Forecast Historical Margin Margin Protection Available from $4.00 - $8.00 cwt

7. Participation Costs $0.54 increase in rate for $0.50 increase in coverage ($6.50 to $7.00)* *Average premium cost per cwt is a function of the amount of production history above 4 M lbs. Farms with production history well over 4M lbs will pay the higher premium tier on a larger percentage of their milk. Table from Hoard’s Dairyman Webinar by Dr. Scott Brown, University of Missouri

8. Maximize Benefits of Margin Protection • The margin protection program premium rates are fixed for the life of the farm bill • Farms may choose annually which coverage level to protect ($4 to $8) • Milk and feed market prices are constantly updating to reflect new market information • Milk Production • Crop Production

9. When to “Buy More” • When coverage level is above expected margins the plan is “in-the-money” • Buy maximum coverage and coverage percentage? (Expensive) • Expected 2009 margin forecast using CME futures • Forecasted average 2009 farm bill margin was $5.15 Maximum Coverage Level of $8.00 $8.00 coverage was $2.85 greater than average margin implied by milk and feed futures

10. When to “Buy Less” • When coverage level is below expected margins the plan is “out-of-the-money” • Buy minimum coverage and coverage percentage? (Risky) • Expected 2014 margin forecast using CME futures • Forecasted average 2014 farm bill margin is $8.86 Maximum Coverage Level of $8.00 Currently $8.00 coverage is below the average margin implied by milk and feed futures

11. Margin Protection Facts • Can provide revenue support during multi-year losses in farm equity • No adjusted growth income or payment limitations • In-the-money Coverage • May provide margin protection at levels greater than CME futures would provide • Out-of-the-money Coverage • Will not provide margin protection at levels greater than $8.00 per cwt • Indemnities calculated every 2 months • Coverage options may be cheaper than LGM-D, futures, and/or options • Is not actuarially fair as premiums are not based on milk and feed market prices

12. Downside of Margin Program • Cannot lock-in margins above $8.00 during good years • With LGM-D, based on CME futures and options, you can (assuming availability) • Based on national average prices • May not reflect farm level risk in milk and feed markets (basis risk) • Feed ration is fixed • LGM-D allows for custom ration • Offers protection only on up to 90% of production history • May not participate in LGM-D (questions remain)

13. USDA Risk Management Options for Dairy Philosophically Different Approaches Target Deficiency Payment Program Futures & Options Based Risk Management LGM-Dairy Protects average gross margin at prevailing market prices, price floor moves up or down Is designed to be actuarially fair pre-subsidy Indemnity payments when actual margins are below guarantee at end of coverage period Lacks sufficient funding for continuous coverage Dairy Margin Protection Program Provides protection against multi-year losses from $4 to $8 cwt Is not actuarially fair and is not based on milk and feed market prices Indemnity payments only when margin falls below user selected coverage level No payment limitations or AGI caps on eligibility

14. Important Regulatory Questions • Will registration for Dairy Margin Protection Program be for 5 years or one year? • If annually, when would producers need to make a decision to enroll in LGM-Dairy vs. Margin Protection? • Can producers continue to protect months after August with contracts purchased prior to Sept. 2014? • How will USDA grandfather in producers who are currently enrolled in LGM-Dairy contracts that cover months after Aug. 2014? • Can producers opt-out of existing LGM-D plans in order to enroll in margin protection? Margin Protection LGM-D “Pick A Lane?”

15. Farmdocdaily Webinar 3/26/2014 www.farmdocdaily.illinois.edu

16. For questions or more information please contact: Dr. John Newton Clinical Assistant Professor, Department of ACE University of Illinois at Urbana-Champaign jcnewt@Illinois.edu Dr. Brian Gould Professor, Department of AAE University of Wisconsin - Madison bwgould@wisc.edu @New10_AgEcon