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

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Dairy Programs in the 2013 Farm Bill What can we learn from crop insurance? Dr. Marin Bozic University of Minnesota Prepared for MN Dairy Leaders Roundtable June 3, 2013 Arden Hills, MN
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Dairy Programs in the 2013 Farm Bill What can we learn from crop insurance?. Dr. Marin Bozic University 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 - PowerPoint PPT Presentation

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

Dr. Marin BozicUniversity of Minnesota

Prepared for MN Dairy Leaders RoundtableJune 3, 2013 Arden Hills, MNOur groupJohn NewtonCameron ThraenMark StephensonBrian GouldChris WolfMarin Bozic

http://aede.osu.edu/dairybriefing

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

Designing new dairy safety netDairy 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 ProgramAverage Annual Simulated MarginDSA if DSMP is Highly Effective

Goodlatte-Scott How much more likely is scenario under G-S?Less than $5.001.46%8.86%6.1$5.00-$6.0010.66%19.96%1.9 $6.00-$7.0038.88%29.68%0.8 $7.00-$8.0030.06%23.98%0.8 Over $8.0018.94%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 recovery6DMSP: Stabilization base for a growing dairy

7Importance 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 programWhy 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 changesSlippery Slope argument: What will happen in 2018 Farm Bill? 9 Basic Margin ProtectionSupplemental Margin Protection: $6.50 Coverage LevelWhat 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 LevelActual Production HistoryCrop Revenue CoverageProtects:Individual YieldIndividual Revenue(yield x price)CAT100%50%67%67%55%64%64%60%64%64%65%59%59%70%59%59%75%55%55%80%48%48%85%38%38%12What can we learn from crop insurance?

Principle: decide before you plant; pay when you harvest.13Supplemental Margin Protection Premiums for Production over 4 million lbsCoverage LevelSenate 2013House 2013Dairy 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 14

Premiums are fixed for the next five years, but conditions may varySource: Newton, J. NWDEPA 201315Six beginning-of-year margin scenarios

16Dairy 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 [email protected] of Applied EconomicsUniversity of Minnesota-Twin Cities

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