Foundation for the Future

Foundation for the FutureA new direction

ForU.S. dairy policy

What is Foundation for the Future?

• New roadmap for U.S. dairy policy• Comprehensive package of proposed dairy

policy programs for 2012 Farm Bill• Focuses on margin protection and market

stabilization vs. just price• Offers protection, stability and growth

What is Foundation for the Future’s approach?

1. Replace current dairy support programs with Dairy Producer Margin Protection Program

2. Establish Dairy Market Stabilization Program

3. Reform milk pricing set by FMMO

Why discontinue the Dairy Product Price Support Program?

• U.S. has become world’s balancing plant• Undercuts U.S. producers, supports global

markets• Dampens ability to export• Reduces demand for U.S. products• Sets outdated price levels • Stifles product innovation

Why Eliminate Milk Income Loss Contract Program

• Offers inconsistent safety net for producers facing low operating margins

• Inadequately offsets high feed costs• Unable to provide price target to track national

milk prices • Promotes unequal treatment of producers (size)

Why is MILC inconsistent?

Year MILC PaymentsAverage Margin

2002 $1,041,984,000 $6.50

2009 $855,360,000 $3.88

Dairy Producer Margin Protection Program

A Real Safety NetFor

Dairy Producers

What is the Dairy Producer Margin Protection Program?

• Floors producer margins during poor dairy market conditions When milk prices are low When feed costs are exceptionally high When markets collapse

• Covers up to 75% of a producer’s milk production history when margins fall below $4.00

• Allows producers to increase their level of margin protection

What are the DPMPP principles?• Voluntary• 2 levels of coverage:

Basic Plan – program available to all producers at no cost

Supplemental Plan – program available to all producers seeking additional/affordable coverage

• Margin protection levels fixed for Farm Bill duration

• Production history fixed for duration of Farm Bill • After implementation, only new producers

eligible for the program

What is the DPMPP producer margin?

• DPMPP Margin defined as: All Milk Price – Total Feed Cost Per Cwt.

• Features new measure of feed cost• New NMPF-developed feed cost ration includes

all dairy animals (dry cows, hospital cows, replacement heifers, calves)

What is DPMPP milk production history?• Highest calendar year milk production of the 3

years prior to DPMPP implementation• New producers without production history

Use most recent monthly data available Extrapolated to a full 12 months

• History is fixed for duration of Farm Bill• Stays with the farm or farmer; can only be

transferred to another farmer with the farm

How does Basic Coverage work?

• Addresses catastrophic losses only - 2009• Voluntary – all producers eligible to sign-up• Basic margin guarantee paid on 75% of

production history or actual production whichever is less

• Basic margin guarantee level fixed at $4.00/cwt.

How does Supplemental Coverage benefit producers?

• Puts producers in control of their own risk management

• Offers higher level of margin protection• Lenders look favorably on it

How does Supplemental Coverage work?

• Voluntary – all producers eligible to participate• Provides fixed additional margin coverage for up

to 90% of production history• Requires annual premium payments (like

homeowners insurance)• Net cost to producer depends on:

Level of additional guarantee selected Volume of milk production to be protected

What is the premium for additional, Supplemental Protection?

The above table is for example purposes only.

Additional Supplemental

Protection Per Cwt.

Premium Per Cwt.

Additional Supplemental

Protection Per Cwt.

Premium Per Cwt.

$0.50 $0.015 $2.50 $0.230

$1.00 $0.036 $3.00 $0.434

$1.50 $0.081 $3.50 $0.590

$2.00 $0.155 $4.00 $0.922

Basic and Supplemental Protection Example• 200 cow dairy, 20,576 lbs/cow, 4.1 million lb.

production history• Wants $2.00/cwt supplemental on 90% of

production history• Annual Premium Rate 15.5¢/cwt, $5,760• 2009 DPMPP Payout:

Basic Protection = $27,357 Net Supplemental Protection = $47,136 Total Producer Receives Net = $74,492

• Average $1.81/cwt. for the year

Dairy Market Stabilization Program

Market Management to Protect Producer Margins

Why do we need the Dairy Market Stabilization Program?• In 2009, producers didn’t overproduce their way

to low margins• A world market price collapse and the domestic

recession impacted the demand and therefore the price of U.S. dairy products and milk

• Low milk prices + high feed costs = Lowest margins ever

• The market eventually corrects itself, but at the expense of producers’ equity

What does the Dairy Market Stabilization Program do? • Acts as a smoke detector• Acts swiftly, but infrequently• Alerts producers when market imbalances occur

Supply and demand Milk price and cost of production

• Helps producers quickly adjust milk production to match demand resulting in Improved milk prices Improved margins

What are the benefits of the Dairy Market Stabilization Program?

• Allows for production growth• Reduces margin volatility• Minimizes government intervention• Available monies used to stimulate

demand/consumption domestically

How does the Dairy Market Stabilization Program work?• Covers all producers in all markets, no exceptions• Uses same margin as DPMPP• Activates if actual margin below trigger margin for

2 consecutive months. If margin below $4 then activates after one month

• Both situations give producer a month to adjust milk marketings

• Producers are paid for a percentage of their milk production base

How is a producer’s DMSP Base determined?• Each calendar year producers choose, if the

DMSP is implemented, whether their base will be: The average monthly milk production for the

three months immediately prior to the USDA announcing that the DMSP will become effective;

OR The same month in the previous year

• DMSP Base is temporary, but fixed during the period in which DMSP is activated

How does the Dairy Market Stabilization Program work?• Margin $6 or less for 2 consecutive months

Producers paid the higher of 98% of their milk base or 94% of current milk marketings

• Margin $5 or less for 2 consecutive months Producers paid the higher of 97% of their milk base or

93% of current milk marketings• Margin $4 or less for 1 month

Producers paid the higher of 96% of their base milk marketings or 92% of current milk marketings

Examples of how DMSP would work• Scenario:• The margins for May and June are below the

$6.00 margin trigger level • USDA announces in the first week of July that

DMSP payment reductions will begin in August• The pay price for August is $14.00/cwt.

DMSP Examples (continued)

• Producer A: Base milk marketings 1,000,000 lbs Markets 1,010,000 million pounds in August Paid for 980,000 lbs. (1,000,000 lbs. times 98%) DMSP deduction from his milk check for August:

• 1,010,000 lbs. minus 980,000 lbs.) = 30,000 lbs• 30,000 lbs. X $14.00/cwt. = $4,200 deducted from

milk check.


• Producer B: Base milk marketings 1,000,000 lbs Markets 1,200,000 pounds in August 1.2 million lbs. minus 98% of his base (980,000 lbs.)

equals 220,000 lbs. 94% of 1.2 million lbs. is 1,128,000 lbs. 1.2 million lbs. minus 1,128,000 lbs. =72,000 lbs. DMSP deduction from his milk check for August:

• 72,000 lbs. X $14.00/cwt. = $10,080


• Producer C: Base milk marketings 1,000,000 lbs Markets 975,000 pounds in August 98% of the base is 980,000 lbs. Actual marketings are less than the base No DMSP deduction from his milk check for August

How does DMSP work? (continued)

• DMSP won’t go into effect or will be suspended when: Actual margin above $6.00 for two consecutive months

or, U.S. cheddar cheese or nonfat dry milk prices are 20%

above world prices

How will the DMSP monies collected be used?• DMSP Board

Appointed by the USDA Secretary Twenty-four (24) Directors representative of the U.S.

diverse dairy producers community. Board decisions made by a 2/3 affirmative vote.

• DMSP Board authority Direct the purchase dairy products with funds

collected for donations to food banks and other food programs

Conduct performance reviews of DMSP every two years, make results and recommendations to USDA Secretary for possible consideration by Congress.

2009 Margins Without DMSP

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

Per H

undr

edw

eigh

t

Actual

Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09$0.00$1.00$2.00$3.00$4.00$5.00$6.00$7.00$8.00$9.00

$10.00

Base DMSP

2009 Margins With/Without DMSPMarginBelow $4.00

USDASays DMSP In

ProducerPaymentReduced

MarginAbove$6.00

ReducedPayments End

MarginBelow $5.00

USDASays DMSP In

MarginAbove$6.00

ReducedPayments End

ProducerPaymentReduced

DMSP Would Have Raised the Average All Milk Price $1.84/cwt. in 2009

Average$14.67

Average$12.83

Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09$10.00

$11.00

$12.00

$13.00

$14.00

$15.00

$16.00

$17.00

$18.00

$19.00

Base DMSP

$/cw

t

Example DMSP & DPMPP

• 200 cow dairy, 20,576 lbs/cow, 4.1 million lb. production history

• $2.00/cwt supplemental on 90% of production history

• Annual Supplemental Premium $5,760 per year• DMSP base production: Same month previous

year

DMSP Example

• 2009 DMSP Milk Check Reductions: March – May = $7,010 September – November = $3,174 Total = $10,184

• Impact on farm revenue Net increase in milk revenue = +$66,880 Net Increase = $1.63/cwt. average for year

DPMPP with DMSP Example• 4.1 million lb. production history• $2.00/cwt supplemental on 90% of production

history• Supplemental Premium $5,760 per year• 2009 DPMPP Payout:

Basic Protection = $3,458 Supplemental Protection Net = $19,490 Total Producer Receives Net= $22,951 Net $0.56/cwt.

• DMSP $1.63 + DPMPP $0.56 = Ave. +$2.19/cwt.

Federal Order ReformCreating a Better Producer

Milk Pricing System

Why revise FMMOs?

• End-product pricing formulas, make allowances, yield factors create winners and losers

• Milk prices too volatile• More transparent milk price discovery needed• Current system stifles product innovation

What will FFTF Federal Order Reform do?• Maintains the number, basic structure and

provisions of federal orders• Replaces price formulas with a competitive

pricing system Promotes fair compensation for producers Reduces market volatility Encourages new products resulting in higher returns

for dairy producers and manufacturers Creates more dynamic dairy industry

What are the key FMMO revisions?

• Establish two classes for pricing milk – fluid (Class I uses) and manufacturing (formerly Class II, III and IV uses).

• Replace end product pricing formulas with competitive milk pricing system for manufacturing milk, no minimum prices.

• Maintain the “Higher Of” for fluid milk minimum price.

• Maintain current Class I differentials

How is Class I price mover calculated?• It is the higher of the:

Adjusted advance weighted average national competitive cheese milk price

OR Advance current Class IV formula price as currently

calculated.

How is the competitive cheese milk price determined?• Weighted average national competitive cheese

milk price Class I mover: Proprietary cheese plants processing 250,000 lbs. of

milk per day surveyed each month. Base month is survey price two months prior to the

month for which the Class I price mover would be effective.

Adjusted for change in NASS cheddar cheese price from first two weeks in base month and first two weeks of month immediately prior to effective Class I mover month

How is the Class IV formula price determined?• The advance Class IV price per hundredweight

Uses current Class IV formula Product values used in current formula NASS butter and nonfat powder prices for the first two

weeks of the month immediately prior to the month for which the Class I price mover would be effective.

• April competitive cheese milk price = $17.57• Competitive price adjustment for change in

cheese value from April to May = ($0.23)• Adjusted April price $17.57-$0.23 = $17.34• Advance Class IV Formula Price = $20.32• Class I Price mover (higher of) = $20.32

Example of Class I price mover calculation for June 2011

$10.00

$11.00

$12.00

$13.00

$14.00

$15.00

$16.00

$17.00

$18.00

$19.00

$20.00

2004 2005 2006 2007 2008 2009 2010 2011* 2012*

Current Class I Price Mover vs. Proposed

Current Higher Of Class III or IV Higher of Comp. Class III or Class IV

CurrentAverage$15.23

ProposedAverage$15.74

What is in “The Pool?”• From Class I handlers:

The applicable Class I differential The difference between the Class I price mover and

the lowest regional competitive adjusted advance cheese milk survey price.

• From processors/handlers of soft products: A 30 cent differential

• From Handlers of milk for butter/powder : The amount Class IV formula price (adjusted for

processing energy costs) is above the region’s competitive cheese milk price.

How “The Pool” is distributed• Handlers of milk used to produce butter/powder

receives a payment from the pool when the current Class IV formula adjusted for energy costs is less than the regional competitive cheese milk price up to a maximum of total funds in the pool.

• The remaining pool balance paid directly to cooperatives/producers subject to location adjustments and other pool balancing adjustments, as today.

• No negative PPDs

What is the impact of reform?

Current FFTF DifferenceNortheast 1 $1.75 $2.01 +$0.26Appalachian 5 $2.62 $2.94 +$0.32Florida 6 $4.32 $4.72 +$0.40Southeast 7 $2.72 $3.03 +$0.31Upper Midwest 30 $0.29 $0.40 +$0.11Central 32 $0.48 $0.71 +$0.24Mid-east 33 $0.80 $1.09 +$0.29Pacific Northwest 124 $0.33 $0.74 +$0.41Southwest 126 $1.41 $1.87 +$0.47Arizona 131 $0.78 $1.01 +$0.23

Producer Price Differentials, 2006-2010

How does reform impact volatility?

-$1.00

-$0.50

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00Federal Order 1 PPD's, 2006-2010

FFTF PPDCurrent PPD


-$1.00

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00


FFTF PPDCurrent PPD


$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

Federal Order 6 PPD's, 2006-2010

FFTF PPDCurrent PPD


$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

Federal Order 7 PPD's, 2006-2010

FFTF PPDCurrent PPD


-$0.60

-$0.40

-$0.20

$0.00

$0.20

$0.40

$0.60

$0.80


FFTF PPDCurrent PPD


-$2.00

-$1.50

-$1.00

-$0.50

$0.00

$0.50

$1.00

$1.50

$2.00


FFTF PPDCurrent PPD


-$1.50

-$1.00

-$0.50

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50


FFTF PPDCurrent PPD


-$3.00

-$2.50

-$2.00

-$1.50

-$1.00

-$0.50

$0.00

$0.50

$1.00

$1.50

$2.00


FFTF PPDCurrent PPD


-$1.50

-$1.00

-$0.50

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00


FFTF PPDCurrent PPD


-$2.00

-$1.50

-$1.00

-$0.50

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00


FFTF PPDCurrent PPD

Economic Analysis of Foundation for the Future

Three Independent Analyses of the Program• Chuck Nicholson and Mark Stephenson

“Analysis of Proposed Programs to Mitigate Price Volatility in the U.S. Dairy Industry

• American Farm Bureau Federation’s Economic Analysis Department “AFBF Analysis of National Milk Producers Federation

Foundation for the Future Proposal”• FAPRI – University of Missouri

“Analysis of NMPF’s Foundation for the Future Program”

Summary• All show a reduction in margin volatility under

FFTF policies• The Dairy Market Stabilization Program (DMSP)

does not trigger often, but when it does, it provides a quick way for markets to balance

• The supplemental feature of the DPMPP gives producers flexibility to add additional margin protection

• General agreement on the effects of FFTF policies by all authors

For further information, please visit www.futurefordairy.com or

email [email protected].

http://www.futurefordairy.com/

mailto:[email protected]

Questions?

Foundation for the Future

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