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Dairy Programs in the 2013 Farm Bill: Economic Analysis and Farm-level Impacts. Dr. Marin Bozic University of Minnesota 2013 MN-WI Dairy Policy Conference April 3, 2013 Rochester, MN. Agenda. Is there a case for dairy safety net? Competing dairy program proposals.
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Dairy Programs in the 2013 Farm Bill: Economic Analysis and Farm-level Impacts Dr. Marin Bozic University of Minnesota 2013 MN-WI Dairy Policy Conference April 3, 2013 Rochester, MN
Agenda • Is there a case for dairy safety net? • Competing dairy program proposals. • Pro and contra supply management. • How would proposed programs work for you? • The Bottom Line.
Break-even margins are always available • 9-12 months ahead
Break-even margins are always available • 9-12 months ahead
Break-even margins are always available • 9-12 months ahead
Argument #1: Liquidity in distant contract months is a major constraint.
Argument #2: Being major export player means major price risks are here to stay.
Designing dairy safety net • Agreement: • Price floors should be abolished. • Instead of milk price, focus should be on profit margins. • Producers should not be asked to make long-term insurance commitments. • Disagreement: • Supply management of some form is an essential policy pillar.
Competing Dairy Policy Proposals • Two alternatives: • Dairy Security Act • Goodlatte-Scott Amendment
Pro and contra supply management • Why it might be a good idea: • Hedging, insurance… increase volatility. • Subsidized margin insurance without market stabilization program may encourage oversupply. Stabilization program needed to contain government expenditures. • Why it might not be such a good idea: • Margin insurance may have to be much more subsidized in order to attract producers to participate in a program where insurance is bundled with supply management.
How would proposed programs work for you? $4.00 basic margin protection
How would proposed programs work for you? $6.50 supplemental margin protection
How would proposed programs work for you? $8.00 supplemental margin protection
Estimating expected effects using market information All-milk price CME Corn Futures & Options CME Class III Milk Futures & Options NASS Corn Price CME Class IV Milk Futures & Options AMS Soybean Meal Price CMESoybean Meal Futures & Options NASS Alfalfa Hay Price Historical correlations
Expected impacts of DSA on a 150 cow farm in 2013 (based on information on Mar 15) * 3-Month Stabilization base and boost based on demand elasticity of -0.4, participation of 75%, and 0 leakage
Expected impacts of GS on a 150 cow farm in 2013 (based on information on Mar 15)
Expected impacts of DSA on a 3000 cow farm in 2013 (based on information on Mar 15) * 3-Month Stabilization base and boost based on demand elasticity of -0.4, participation of 75%, and 0 leakage
Expected impacts of GS on a 3000 cow farm in 2013 (based on information on Mar 15)
Let’s play a game… Imagine that it is January 15, 2008. Dairy Security Act has just become a law. You are the owner of ‘North Star Dairy’ a fictional large dairy operation in Minnesota that had grown to about 2000 cows at the end of 2012. You have made a decision to participate in the DPMPP/DMSP in 2008. Let’s see how did the program work for you over 2008-2012 period.
Please take a look at this device… (forget everything from 2008+)
Did stabilization program hamper growth? Not really.
Is there a role left for private risk markets? Some. Could be a problem.
