Dairy Producer Margin Protection Program February 14, 2014 University of Wisconsin Webinar Series Dr. John Newton Clinical Assistant Professor, Department of ACE University of Illinois at Urbana- Champaign [email protected] @New10_AgEcon
Jan 21, 2016
Dairy Producer Margin Protection Program
February 14, 2014University of Wisconsin Webinar Series
Dr. John NewtonClinical Assistant Professor, Department of ACEUniversity of Illinois at [email protected]
@New10_AgEcon
Major Dairy Provisions of 2014 Farm Bill
• Creates a Dairy Producer 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
Margin Protection Program
• Dairy Producer Margin Protection Program
• Voluntary program with annual coverage decision
• Protects dairymen from severe downturns in
the milk price, rising livestock feed prices, or a
combination of both.
• Pays indemnity when the average difference between
the USDA national All-Milk price and a feed ration
index falls below a user selected coverage level
Important Margin Elements
• Actual Dairy Production Margin
• All-milk price minus feed ration value
• Actual Dairy Production History
• Maximum calendar year production 2011-2013 (revised annually)
• Coverage Percentage
• 25% to 90% in 5% increments
• Coverage Level
• $4.00/cwt to $8.00/cwt in 50¢ increments
Determine Appetite for Risk
$4.00
$8.00
$6.00
25% 90%60%
Greater Protection at a greater cost
Coverage Quantity
Cove
rage
Lev
el
Graphic from Hoard’s Dairyman Webinar by Dr. Scott Brown, University of Missouri
Protects Against Margin Declines
20
08
20
09
20
10
20
11
20
12
20
13
20
14
-
2.00
4.00
6.00
8.00
10.00
12.00
14.00
Date
$/cwt
Margin Protection Available from $4.00 - $8.00 cwt
Historical Margin
2014 Forecast
Participation Costs
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.)
$4.
00
$4.
50
$5.
00
$5.
50
$6.
00
$6.
50
$7.
00
$7.
50
$8.
00
$0.00$0.20$0.40$0.60$0.80$1.00$1.20$1.40$1.60
Premium Rates
First 4 M lbs PH After 4 M lbs PH
$0.54 increase in rate for $0.50 increase in coverage ($6.50 to
$7.00)*
Table from Hoard’s Dairyman Webinar by Dr. Scott Brown, University of Missouri*Average premium cost per cwt is a function of the amount of production history above 4 M lbs. Farms with production history well over 4M lbs will pay the higher premium tier on a larger percentage of their milk.
Maximize Benefits of Margin Protection
• The margin protection program premium
rates are fixed for the life of the farm bill
• Farms may choose annually which
coverage level to protect ($4 to $8)
• Milk and feed market prices
are constantly updating to
reflect new market
information• Milk Production• Crop Production
When to “Buy More”
•When coverage level is above expected margins the plan is “in-the-money”
• Buy maximum coverage and coverage percentage? (Expensive)• Expected 2009 margin
forecast using CME futures
• Forecasted average 2009 farm bill margin was $5.15
-
2.00
4.00
6.00
8.00
10.00
12.00
14.00
Expected 2009 Farm Bill Margin
$/cwt
$8.00 coverage was $2.85 greater than average margin implied by milk and feed futures
Maximum Coverage Level of $8.00
-
2.00
4.00
6.00
8.00
10.00
12.00
14.00
Expected 2014 Farm Bill Margin
$/cwt
When to “Buy Less”
•When coverage level is below expected margins the plan is “out-of-the-money”
• Buy minimum coverage and coverage percentage? (Risky)• Expected 2014 margin
forecast using CME futures
• Forecasted average 2014 farm bill margin is $8.86
Currently $8.00 coverage is below the average margin implied by milk and feed futures
Maximum Coverage Level of $8.00
Margin Protection Facts
• Can provide revenue support during multi-year losses in farm equity• No adjusted growth income or payment limitations• In-the-money Coverage• May provide margin protection at levels greater than CME futures
would provide
• Out-of-the-money Coverage• Will not provide margin protection at levels greater than $8.00
per cwt
• Indemnities calculated every 2 months• Coverage options may be cheaper than LGM-D, futures, and/or options• Is not actuarially fair as premiums are not based on milk and feed
market prices
Downside of Margin Program
• Cannot lock-in margins above $8.00 during good years
• With LGM-D, based on CME futures and options, you can (assuming
availability)
• Based on national average prices
• May not reflect farm level risk in milk and feed markets (basis risk)
• Feed ration is fixed
• LGM-D allows for custom ration
• Offers protection only on up to 90% of production history
• May not participate in LGM-D (questions remain)
USDA Risk Management Options for Dairy
Philosophically Different Approaches
Futures & Options Based Risk ManagementTarget Deficiency Payment Program
Dairy Margin Protection Program 1. Provides protection against multi-
year losses from $4 to $8 cwt2. Is not actuarially fair and is not
based on milk and feed market prices
3. Indemnity payments only when margin falls below user selected coverage level
4. No payment limitations or AGI caps on eligibility
LGM-Dairy1. Protects average gross margin at
prevailing market prices, price floor moves up or down
2. Is designed to be actuarially fair pre-subsidy
3. Indemnity payments when actual margins are below guarantee at end of coverage period
4. Lacks sufficient funding for continuous coverage
Important Regulatory Questions
1. Will registration for Dairy Margin Protection Program
be for 5 years or one year?
2. If annually, when would producers need to
make a decision to enroll in LGM-Dairy vs.
Margin Protection?
3. Can producers continue to protect months
after August with contracts purchased prior
to Sept. 2014?
4. How will USDA grandfather in producers who
are currently enrolled in LGM-Dairy contracts
that cover months after Aug. 2014?
5. Can producers opt-out of existing LGM-D
plans in order to enroll in margin protection? “Pick A Lane?”
LGM-DMargin
Protection
Farmdocdaily Webinar 3/26/2014
www.farmdocdaily.illinois.edu
For questions or more information please contact:
Dr. John NewtonClinical Assistant Professor, Department of ACEUniversity of Illinois at [email protected] @New10_AgEcon
Dr. Brian GouldProfessor, Department of AAEUniversity of Wisconsin - [email protected]