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Marin Bozic Midwest Dairy Expo St. Cloud, MN November 27-28, 2012. Plan for today. Big changes I: What Goes Away Big changes II: What’s Coming Up Income over Feed Costs Margins Margin Insurance Stabilization Program. New federal dairy policy - timeline.

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Marin bozic midwest dairy expo st cloud mn november 27 28 2012

Marin Bozic

Midwest Dairy Expo

St. Cloud, MN November 27-28, 2012


Plan for today
Plan for today

  • Big changes I: What Goes Away

  • Big changes II: What’s Coming Up

  • Income over Feed Costs Margins

  • Margin Insurance

  • Stabilization Program


New federal dairy policy timeline
New federal dairy policy - timeline

  • September 2011: Rep. Peterson introduces Dairy Security Act of 2011

  • May 2012: Senate passes S3240 (Senate version of Farm bill)

  • July 2012: House Ag. Committee passes HR 6083 (House version of Farm bill)

  • August 2012: The country goes crazy until elections are over

  • This week: Some movement finally?


Discontinued programs
Discontinued programs

  • Dairy Products Price Support Program – as of December 31, 2012

  • Milk Income Loss Contract (MILC) – gone as of October 1, 2012



Milc was a big help for small producers
MILC was a big help for small producers with the rest of the world


From foundation for the future to 2012 farm bill
From Foundation for the Future with the rest of the worldto 2012 Farm Bill


Income over feed costs margin
Income over Feed Costs Margin with the rest of the world

  • All-Milk ($/cwt)

    - 1.0728 x Corn ($/bu)

    - 0.0735 x Soybean meal ($/ton)

    - 0.0137 x Alfalfa hay ($/ton)

  • Feed ration per cwt of milk:

    • 30 pounds of shell corn,

    • 106.4 pounds of corn silage,

    • 14.7 pounds of soybean meal

    • 27.4 lbs of alfalfa hay


Where does this formula come from
Where does this formula come from? with the rest of the world


Where does this formula come from1
Where does this formula come from? with the rest of the world


Income over feed costs margin 2004 2012
Income over Feed Costs Margin: 2004-2012 with the rest of the world


Subsidized margin insurance
Subsidized margin insurance with the rest of the world

  • Official name: Dairy Producer Margin Protection Program (PDMPP)

  • Two layers:

    • Basic Margin Protection – “Free” protection at $4.00 margin

    • Supplemental Margin Protection – Can buy up from $4.50 to $8.00 margin in 50 cents increments (called “Coverage Level”)


Supplemental margin protection premiums for the first 4mil lbs
Supplemental Margin Protection with the rest of the worldPremiums for the first 4mil lbs

  • Supplemental Margin Protection Premiums (annual):


Supplemental margin protection premiums for above 4mil lbs
Supplemental Margin Protection with the rest of the worldPremiums for above 4mil lbs

  • Supplemental Margin Protection Premiums (annual):


Basic margin protection
Basic Margin Protection with the rest of the world





Dpmpp what triggers it exactly
DPMPP: What triggers it exactly? with the rest of the world

  • Calendar year is divided into consecutive two-month periods

  • Average margin must be below the purchased coverage level in order for indemnities to be due.


Dpmpp what is the payment rate
DPMPP: What is the payment rate? with the rest of the world

  • Basic Margin Protection

  • The difference between the actual margin and $4.00, except that, if the difference is more than $4.00, the Secretary shall use $4.00

  • Example: Jerry subscribed for basic margin protection. For Jul-Aug, payment rate was $1.14 per cwt. If Jul-Aug margin was -$0.50, payment would have been $4.00 per cwt.


Dpmpp what is the payment base
DPMPP: What is the payment base? with the rest of the world

  • Supplemental Margin Protection:

  • The difference between coverage level and the greater of actual margin and $4.00.

Example: Jerry also subscribed for supplemental margin protection at $6.50 coverage level. For Jul-Aug, the payment rate on supplemental was $6.50- max($4.00, $2.86) = $2.50


Dpmpp what is the payment base1
DPMPP: What is the payment base? with the rest of the world

  • Basic Production History

  • Used in Basic Margin Protection

  • Equal to the highest annual milk marketings in any 1 of the 3 calendar years immediately preceding the calendar year in which the participating dairy signed up

  • Annual Production History:

  • Used in Supplemental Margin Protection

  • Equal to the actual milk marketings of the participating dairy during the preceding calendar year


Dpmpp what is the actual payment base
DPMPP: What is the with the rest of the worldactual payment base?

  • Basic Margin Protection:

    Actual DPMPP base used for indemnity is the lesser of

    • 80 percent of the basic production history, divided by 6

    • Actual quantity of milk marketed during the consecutive 2-month period


Dpmpp what is the actual payment base1
DPMPP: What is the with the rest of the worldactual payment base?

Supplemental Margin Protection:

  • Coverage Percentage must be chosen by producer: not less than 25 percent, nor more than 90 percent of annual production history

  • Actual DPMPP base used for indemnity is chosen coverage percentage times the lesser of

    • Annual production history divided by 6

    • Actual quantity of milk marketed during the consecutive 2-month period


Dpmpp payment base example
DPMPP payment base - example with the rest of the world

Jerry has a farm with 150 milking cows, with rolling herd average of 21,000 lbs. His annual milk marketings were:

2009: 3,140,146 lbs

2010: 3,142,638 lbs

2011: 3,130,758 lbs

  • His basic production history is 3,142,638 lbs. His annual production history is 3,130,758 lbs.


Dpmpp payment base example1
DPMPP payment base - example with the rest of the world

  • In July-August period, milk production on his farm was 528,229lbs.

  • Basic Margin Protection actual base:

    Min(0.8x3,142,638/6, 528,229)

    = min(419,018; 528,229) = 419,018.

  • Supplemental Margin Protection actual base (with coverage percentage of 90 percent)

    0.9 x min(3,130,758/6, 528,229)

    = 0.9 x min (521,793, 528,229)= 469,613


Dpmpp putting it all together
DPMPP – putting it all together with the rest of the world

  • For July-August period, Jerry would get:

    Basic Margin Protection: $1.14/cwt x 4,190 cwt = $4,476

    Supplemental Margin Protection (@$6.50 coverage level): $2.50 x 4,696 cwt = 11,740

    Total = $16,216

Effective indemnity per cwt marketed: $3.07/cwt


Dpmpp how much does it cost
DPMPP – how much does it with the rest of the worldcost?

  • Entry fee (annual):

  • Premiums for supplemental margin protection…


Dairy market stabilization program
Dairy Market Stabilization Program with the rest of the world

Trigger:

  • Actual margins of $6.00 or less for each of the immediately preceding two months

  • Actual margin of $4.00 or less for the immediately preceding month


Dmsp what is the stabilization base
DMSP – What is the stabilization base? with the rest of the world

  • Volume of average milk marketings for the three months immediately preceding the announcement that the stabilization program is activated

    OR

  • Volume of monthly milk marketings for the same month in the preceding year as the month in which DMSP is declared active


Dmsp what is the penalty
DMSP – what is the “penalty”? with the rest of the world

  • Producer is not going to be paid for more than the greater of…

    • If margins were $5.00-$6.00:

      • 98 percent of stabilization base

      • 94 percent of the marketings of milk

    • If margins were $4.00-$5.00

      • 97 percent of stabilization base

      • 93 percent of the marketings of milk

    • If margins were less than $4.00

      • 96 percent of stabilization base

      • 92 percent of the marketings of milk







The bottom line
The Bottom Line with the rest of the world

  • New dairy policy will be based on subsidized margin insurance, likely complemented with market stabilization program

  • Premiums for DPMPP are fixed, and heavily subsidized. It makes economic sense to consider participating in these programs.


2012 Farm Bill with the rest of the world

presented at the Midwest Dairy Expo St Cloud, MN, November 27, 2012

Dr. Marin Bozic

[email protected]

Department of Applied Economics

University of Minnesota-Twin Cities

317c Ruttan Hall

1994 Buford Avenue

St Paul, MN 55108

You may download this presentation at

http://marinbozic.info/


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