Dairy Programs in the 2013 Farm BillWhat can we learn from crop insurance?

Dr. Marin BozicUniversity of Minnesota

Prepared for MN Dairy Leaders Roundtable

June 3, 2013 Arden Hills, MN

Our group…

John Newton Cameron Thraen Mark Stephenson Brian Gould Chris Wolf Marin Bozic

http://aede.osu.edu/dairybriefing

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

Designing new dairy safety net

Dairy Market Stabilization Program: When margins are critically low, provides temporary

disincentives to milk production growth.

Dairy Producer Margin Protection Program: Hybrid between countercyclical payments program

and subsidized margin insurance program.

Dairy Market Stabilization Program

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2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00 $/cwt

Average Annual

Simulated Margin

DSA – if DSMP is Highly Effective

Goodlatte-Scott

How much more likely is

scenario under G-S?

Less than $5.00 1.46% 8.86% 6.1$5.00-$6.00 10.66% 19.96% 1.9 $6.00-$7.00 38.88% 29.68% 0.8 $7.00-$8.00 30.06% 23.98% 0.8 Over $8.00 18.94% 17.52% 0.9

Based on margins forecasted with January 15, 2013 data.Elasticity of Demand: -0.20 Milk Volume Participation: 75%

If, effective, DMSP could indeed accelerate margin recovery

DMSP: Stabilization base for a growing dairy

Importance and Fragility of Dairy Exports

• U.S. dairy exports now consume one day worth of milk production per week.

• Over the last 10 years, over half of the growth in U.S. milk production was exported.

• Over the last 5 years, over two thirds of the growth in U.S. milk production was exported.

Milk yield per cow in NZ is highly volatile due to pasture-based production system. That means that we should anticipate large swings in U.S. milk prices in the coming decade.

Pro and contra stabilization program

Why it might be a good idea: It could reduce government costs. It could 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: Creative private contracts could reduce effectiveness. Interference with spatial structural changes Slippery Slope argument: What will happen in 2018 Farm Bill?

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

Basic Margin Protection

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

Supplemental Margin Protection: $6.50 Coverage Level

What can we learn from crop insurance?

Yield: Individual historical yield.

Price: Expected harvest price is the average December's futures contract prices during February.

Coverage Level

Actual Production

History

Crop Revenue Coverage

Protects: Individual Yield

Individual Revenue(yield x price)

CAT 100%50% 67% 67%55% 64% 64%60% 64% 64%65% 59% 59%70% 59% 59%75% 55% 55%80% 48% 48%85% 38% 38%

What can we learn from crop insurance?

Principle: decide before you plant; pay when you harvest.

Supplemental Margin Protection – Premiums for Production over 4 million lbs

Coverage Level Senate 2013 House 2013 Dairy

Freedom Act$4.00 $0.00 $0.00 $0.03 $4.50 $0.02 $0.02 $0.05 $5.00 $0.04 $0.04 $0.07 $5.50 $0.10 $0.08 $0.11 $6.00 $0.15 $0.16 $0.19 $6.50 $0.29 $0.23 $0.29 $7.00 $0.62 $0.43 $0.38 $7.50 $0.83 $0.59 $0.83 $8.00 $1.06 $0.92 $1.06

Premiums are fixed for the next five years, but conditions may vary…

Source: Newton, J. NWDEPA 2013

Six beginning-of-year margin scenarios

Dairy programs in the 2013 Farm BillWhat can we learn from crop insurance?

prepared for MN Dairy Leaders Roundtable

Monday, June 3, 2013Arden Hills, MN

Dr. Marin Bozicmbozic@umn.eduDepartment of Applied EconomicsUniversity of Minnesota-Twin Cities