http://amap.missouri.edu

Farm Bill/Dairy PolicyFebruary 26, 2014Dairy Gross Margin, LLC

Dr. Scott BrownAgricultural Markets and PolicyDivision of Applied Social Sciences

brownsc@missouri.edu

The Long Road To A Farm Bill EndsAugust 2011 - The Budget Control Act of 2011 was passed. April 26, 2012- The Senate Agriculture Committee passes a Farm Bill.June 21, 2012- The Senate passes a Farm Bill.July 12, 2012- The House Agriculture Committee passes a Farm Bill.December 31, 2012- The Farm Bill is Extended for One Year.May 14, 2013- The Senate Agriculture Committee passes a Farm Bill.May 15, 2013- The House Agriculture Committee passes a Farm Bill.June 10, 2013- The Senate passes a Farm Bill.June 20, 2013- The Farm Bill fails on the House floor.July 11, 2013- The House passes a “Farm Only” Farm Bill.September 19, 2013- The House passes a nutrition bill.January 29, 2014- The House passes a Farm Bill conference report.February 3, 2014- The Senate passes a cloture motion on the Farm Bill conference report.February 4, 2014- The Senate passes the Farm Bill conference report.February 7, 2014- President Obama signs the Farm Bill conference report.

Source: Modified from farmpolicy.com

A Fundamental Change In Dairy Policy

New farm bill dairy provisions give a new level of flexibility for dairy producers

Program flexibility requires additional homework for producers to optimize their participation in the program

MILC gives way to new program flexibility No production caps Coverage quantity and margin level has flexibility

Pay particular attention to the final language Dairy policy evolved in the last few weeks Some important changes relative to earlier versions

USDA Rulemaking Will Be Critical

The exact operation of the new farm bill depends on USDA interpretation of the legislative language.

Major Dairy Provisions in AA2014 Creates a 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

When Will The Margin Program Begin?

USDA must begin the program no later than September 1, 2014

Difficult for USDA to start earlier than that date Suggests signup will have to occur in the

July/August timeframe Begin your selection process now as signup will

likely be up against the deadline $100 registration fee gets $4.00 margin coverage Margin payments will occur on a bimonthly basis

beginning with January/February

National Program Margin Calculation

All Milk Price less Feed Cost The average cost of feed for a dairy operation required to

produce a Cwt. of milk, determined in accordance with the following formula: [1.0728 x price of corn/bu.] + [0.00735 x price of soybean meal/ton] + [0.0137 x price of alfalfa hay/ton].

Milk, corn and alfalfa prices reported in Agricultural Prices; soybean meal price is Central Illinois, USDA/AMS

The calculation required by this subsection shall be made as soon as practicable using the full-month price of the applicable reference month. A lag in information, the January all milk price released at the

end of February It will take USDA time to process payments

Feed Costs From NMPF’s Original Work With One Modification

Historical Monthly U.S. Margin

199719982000200220042005200720092011201202468

10121416

$ pe

r cwt

Hoard’s Webinar – Percentage of Producer Participation

Less Than 25 Percent

25 to 50 Percent

50 to 75 Percent

Greater Than 75 Percent

0 5 10 15 20 25 30 35 40 45

12

31

40

16

Percentage

Producers Should Calculate Their Own Margin

It is important to know how your margin changes over time relative to the national margin

The higher the correlation between a producer’s margin and the national margin the better the safety net

I have heard, “I am not participating because my margin is different than the national margin.”

My response, “The level doesn’t matter as much as the month to month movements. Are you sure about participation?”

Take the time to do the comparison! Change the mentality to insurance versus program

maximization

Producers Will Be Assigned A Production History

Highest annual milk marketings during 2011, 2012 or 2013.

USDA will adjust production history annually to reflect an increase in U.S. milk production

An operation’s marketings growth does not matter in the adjustment to production history

New dairy operations Volume of actual milk marketings extrapolated to

a yearly amount Estimated from herd size

A 2 Million Pound Production History Producer And Annual U.S. Milk Production Grows by 2% Annually

Production History

2015 2016 2017 20180.00

0.50

1.00

1.50

2.00

2.50

Mill

ion

Poun

ds

Higher Premiums At Higher Margin Coverage Levels

Margin First 4 Above 4Level million pounds million pounds

$4.00 $0.000 $0.000$4.50 $0.010 $0.020$5.00 $0.025 $0.040$5.50 $0.040 $0.100$6.00 $0.055 $0.155$6.50 $0.090 $0.290$7.00 $0.217 $0.830$7.50 $0.300 $1.060$8.00 $0.475 $1.360

* - In 2014 and 2015 the premium rates for the first 4million pounds will be reduced by 25 percent at all levelsexcept at the $8.00 level. A producer will also pay $100 annually in administrative fees.

Premium Rates For Selected Margin Level Coverage *

($ per cwt.)

Hoard’s Webinar – Best Margin Level

$4

$4.00 - $5.50

$5.50 - $6.50

$6.50 - $7.50

$8.00

0 5 10 15 20 25 30 35 40 45

14

20

39

21

7

11

39

27

17

6

> 4 million pounds < 4 million

Percentage

Compare The Added Cost For Each $0.50 Of Additional Margin Protection

* - In 2014 and 2015 the premium rates for the first 4million pounds will be reduced by 25 percent at all levelsexcept at the $8.00 level. A producer will also pay $100 annually in administrative fees.

$0.54 increase in premiumFor $0.50 more margin coverage

Selection of Coverage Percentage

A producer can choose to cover 25 to 90 percent of their production history in 5 percent increments annually

Creates interesting tradeoffs between coverage level and coverage quantity If you expect low margins, high coverage level and

quantity If you expect high margins

Reduce coverage level Reduce coverage quantity Reduce both Reduce neither

Hoard’s Webinar – Annual Adjustment

Never Change Either

Adjust Coverage Level Only

Adjust Coverage Quantity Only

Adjust Both

0 10 20 30 40 50 60

9

26

9

57

Percentage

How Much Risk Can Your Operation Afford?

$4.00

$8.00

$6.00

25% 90%60%

Greater Protection at a greater cost

Coverage Quantity

Cove

rage

Lev

el

Dairy Product Donation Program

Must be operational no later than 120 days after the margin program begins

When the margin is less than $4.00 for the two preceding months, this feature becomes operational

Secretary purchases dairy products at prevailing market prices and distributes to public and private nonprofits assisting low-income households

This program suspended: After three months of operation Margins move above $4.00 Margins between $3.00 and $4.00 AND U.S. prices exceed world

prices by more than 5% Margins less than $3.00 AND U.S. prices exceed world prices by

more than 7%

Hoard’s Webinar – Dairy Product Donation Program Large Purchases

Yes

No

Implementation

0 10 20 30 40 50 60

24

23

53

Percentage

USDA Regulations Will Clarify Program Operation

Do I get payments on production history even if I don’t produce that amount?

Premium rates for those over 4 million pounds of production history

There will be other USDA interpretations that will make a difference

Summary Do not forget that how other producers choose to

participate should affect your choice Large participation means low margins remain longer Small participation means many producers see full

market effects of low margins This is a large change in dairy policy

Spend time thinking how your operation should participate

If your operation can not afford risk increase coverage

Each operation is unique