Dairy Policy Reforms and Advanced Dairy Risk Management ...

Dairy Policy Reforms and Advanced Dairy Risk Management Strategies Dr. Marin Bozic Vita Plus 2014 Dairy Summit Red Wing, MN, December 10, 2014

Agenda For Today

1. 2. 3. 4. 5. 6. 7.

MPP-Dairy: Time To Decide What Will You Do? Tools and Resources at Your Disposal Is MPP-Dairy Useless Out West? IS MPP-Dairy Subsidized? What Happens to Supply Dynamics Once MPP Kicks In? Outlook for 2015 – Say Cheese (Nobody’s Smiling)

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MPP-Dairy: Time to Make a Decision

MPP-Dairy signup as of Dec 3: Texas: 75% New Mexico: 64% Nebraska: 46% Minnesota: 42% California: 32% Wisconsin: 30% Idaho: 18% Pennsylvania: 16%

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Txt surveys on MPP-Dairy

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5


6


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Resources as you make your decision: 1. The FSA Tool

http://DairyMarkets.org/MPP/Tool 8

Resources for MPP-Dairy Decision: 2. MPP Dashboard

http://DairyMarkets.org/MPP/Dashboard

Resources for MPP-Dairy Decision: 3. UMN Online Course

http://farmbill.umn.edu

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Would MPP-Dairy Help Western Dairies?

• “The situation in California is the worst of both worlds: Its allmilk price is consistently lower than the national average, and its feed costs are consistently higher. As a result; the state's margin since 2007 has averaged $2.4 7 less than the national margin.” • “As national margins erode, Western margins will drop lower because they already are lower. Profits will disappear faster. Losses will happen sooner and they will be bigger.” Hoard’s Dairyman West, September 25, 2014.

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MPP-Dairy: Milk Price Basis (Region Minus US All-Milk) 2.00 1.50

1.00 0.50 0.00 -0.50 -1.00 -1.50 -2.00 2007

2008

2009

Upper Midwest

2010 Texas

2011 Idaho

2012

2013

California 12

MPP-Dairy: Feed Cost Basis (Region Minus MPP Feed) 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 -0.50 -1.00 2007

2008

2009

Upper Midwest

2010 Texas

2011 Idaho

2012

2013

California

Homegrown feed valued at market prices. Replacement heifers feed costs included. 13

MPP-Dairy: Milk Income over Feed Costs Margin Basis 3.00 2.00 1.00 0.00 -1.00 -2.00 -3.00 -4.00 -5.00 2007

2008

2009

Upper Midwest

2010 Texas

2011 Idaho

2012

2013

California 14

What kind of risk protection do I need?

Loss Tolerance Required Farm-level IOFC Margin MPP-Dairy Effectiveness

Other Operating Costs IOFC Basis

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Other Operating Costs (Excluding Feed, Herd Replacement and Depreciation) $9.00 $8.00 $7.00

$6.00 $5.00 $4.00

$3.00 $2.00 $1.00

$0.00 2007

2008

2009

Upper Midwest

2010 Texas

2011 Idaho

2012

2013

California 16

2009 Net Farm Income Per Cwt

How much would MPP-Dairy help in a year like 2009? $0.00 -$1.00 -$2.00 -$3.00 -$4.00 -$5.00

71%

55%

44%

53%

Upper Midwest

Texas

Idaho

California

-$6.00 Full Loss

Loss after MPP 17

Max Loss Calculator Item

Value

Non-Feed Costs of Production Expected IOFC Basis over MPP in a Bad Year 2015 Milk Production Growth over Production History

$7.75

Coverage Percentage Percent of 2015 Milk Covered Under MPP Needed MPP IOFC for No Losses MPP Coverage Level MPP Premiums Maximum Losses

90% 87.4% $6.58 $5.00 $0.04 $1.62

$2.00 3%

Is MPP-Dairy Subsidized? $1.40 $1.20 $1.00 $0.80 $0.60 $0.40 $0.20 $0.00 $4.00 $4.50 $5.00 $5.50 $6.00 $6.50 $7.00 $7.50 $8.00 First 4 M lbs PH

After 4 M lbs PH

MPP-Dairy Subsidies are Implied in Margin Forecasts Expected Margins Much Below Historical Average

Expected Margins Near Historical Average

Expected Margins Much Above Historical Average

Margin Insurance Premiums are Very Highly Subsidized.

Modestly Subsidized.

Margin Insurance Premiums are Too Expensive! 20

Comparing MPP-Dairy vs. CSC’s Revenue over Feed $18.00 $16.00 $14.00 $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $0.00 2007

2008

2009

2010

USDA MPP-Dairy Margin

2011

2012

2013

2014

CSC Revenue over Feed

MPP-Dairy: All-Milk – 1.0728* NASS Corn – 0.00735 * AMS Soybean Meal – 0.0137 * Alfalfa Hay CSC ROF: Class III Milk – CME Corn – 0.01 CME Soybean Meal

Comparing MPP-Dairy vs. CSC’s ROF Puts

Coverage Level

CSC Revenue over Feed Puts 12/9/2014

USDA

H1 2015

H2 2015

$6.00

$0.26

$0.54

$0.16

$7.00

$0.47

$0.79

$0.83

$8.00

$0.81

$1.12

$1.36

Strikes up to $6.00 are likely to be cheaper through FSA. Strikes above $6.00 are likely to be cheaper from the private sector. Private sector products can be customized. For example, $7.00 Long Put + $10 Short Call costs only $0.11 for 2015 (plus service charge of $0.004/cwt/month). Source: http://www.aghedgedesk.com/

CSC’s Revenue over Feed 2001/01 – 2014/11

Hedge Front Months for the Show, Hedge Back Months for the Dough!


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Will MPP-Dairy Change the Supply Dynamics?

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Low Margins and Supply Dynamics: Wisconsin

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Nicholson & Stephenson: Simulated MPP Margins 2015-18 12.00 10.00

$/cwt

8.00 6.00 4.00 2.00 0.00 Jan-15

Jul-15

Jan-16

Jul-16

Jan-17

Old Dairy Programs

Jul-17

Jan-18

Jul-18

With MPP

Average MPP decreases $0.91/cwt, margin < $8 most of time 28


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Cheese Futures for 2015 Tumbling Lower $1.90

$1.85 $1.80 $1.75 $1.70 $1.65 $1.60 $1.55

$1.50 $1.45 Jan

Feb Mar Apr May Jun

Jul

Aug Sep

Oct Nov Dec

2015

Sep '14

Oct '14

Nov '14

Dec '14 30

Skim Milk Powder Exports Prospects 150%

$0.60 $0.40

100%

$0.20 50%

$0.00

0%

-$0.20 -$0.40

-50%

-$0.60 -100%

-$0.80

-150%

-$1.00

U.S. Skim Milk Powder Exports Growth US - Oceania Skim Milk Powder Price Basis 31

Butter Stocks/Use (in Days of Consumption) 80 days 70 days 60 days 50 days 40 days 30 days 20 days 10 days

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

0 days

2013 Actual

2014 2005-2014 Average 32

Acknowledgements

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Dairy Policy Reforms and Advanced Dairy Risk Management Strategies VitaPlus Dairy Summit 2014 Red Wing, MN December 10, 2014

Dr. Marin Bozic [email protected] Department of Applied Economics University of Minnesota-Twin Cities 317c Ruttan Hall 1994 Buford Avenue St Paul, MN 55108 Photo Credits: Mara at Blue Diamond Dairy © Sadie Frericks, 2010