Margin Protection Program vs LGM-Dairy. 10. ⢠MPP-Dairy enrollment: No impact on ability to .... Decision-Making Flowc
MPP-Dairy and Dairy Outlook for 2016
Marin Bozic October 16, 2015 Seventh District Association Ag Credit Companies
Agenda for Today A Path Forward Stress-Test Analysis
5 4
1
3 Dairy Situation & Outlook
MPP-Dairy Refresh
2 Participation Statistics 2
Actual Dairy Production Margin: Historical Sep-Oct ‘14: $15.52
May-Jun '09: $2.49 3
MPP Coverage Levels and Premiums
$4.00 $4.50 $5.00 $5.50 $6.00
Tier 1 ≤ 4mil lbs covered ($/cwt) $0.000 $0.010 $0.025 $0.040 $0.055
Tier 2 >4 M lbs. covered ($/cwt) $0.000 $0.020 $0.040 $0.100 $0.155
$6.50 $7.00 $7.50 $8.00
$0.090 $0.217 $0.300 $0.475
$0.290 $0.830 $1.060 $1.360
Coverage Level
New for 2016: No More Discounted Tier 1 Premiums
4
MPP Margins in 2015 (Aug-Dec Forecast as of 9/12/2015) Month
2015
January
8.34
February
7.66
March
7.52
April
7.48
May
7.83
June
8.16
July
7.45
August
7.94
September
8.57
October
9.04
November
9.08
December
8.83
Two-month Average
Coverage Level & Indemnities $6.50
$8.00
7.99554
0.00
0.00446
7.50415
0.00
0.49585
7.99534
0.00
0.00466
7.69
0.00
0.00
8.81
0.00
0.00
8.96
0.00
0.00
Gross MPP-Dairy Payments: 2000-2015 ---- $4.00
6
Gross MPP-Dairy Payments: 2000-2015 ---- $6.50
7
Registration Period For 2016
JUL
NOV
01
20
MPP-Dairy Registration & Annual Coverage Election Period Opens
Last Day to Register or Choose Coverage for 2016
8
Production History Unlike old dairy safety net based on MILC, there are no categorical limits to size of the farm. You can protect up to 90% of your production history, which is the highest of your milk marketings in 2011, 2012, and 2013. Production history is assigned to the operation, not the individual. Each year, your production history will increase based on national growth in milk yield per cow. The adjustment for 2015 is 0.087%. New: production history adjustment for 2016 is 2.61%
9
Margin Protection Program vs LGM-Dairy MPP-Dairy enrollment: No impact on ability to use other risk management systems except for Livestock Gross Margin for Dairy (LGM) Cannot participate in both MPP and LGM
10
% of milk covered at a certain level or higher
Percent of Expected 2015 Milk Production by MPP-Dairy Coverage Level (Cumulative) 100% 90% 80% 70%
67.6%
60% 50% 40% 30% 20% 10% 0%
26.0% 25.8% 23.1% 22.0% 10.3% 2.1%
1.7%
0.3%
$4.00 $4.50 $5.00 $5.50 $6.00 $6.50 $7.00 $7.50 $8.00 11
Percent of Enrolled Herds Buying Above $4.00/cwt
12
Percent of Expected 2015 Milk Production by MPP-Dairy Coverage Level Idaho
None
New York
$4.00/cwt
$4.50-$5.50/cwt
Minnesota
$6.00/cwt or higher 13
Percent of Expected 2015 Milk Production by MPP-Dairy Coverage Level Iowa
None
Wisconsin
$4.00/cwt
$4.50-$5.50/cwt
Minnesota
$6.00/cwt or higher 14
Average Coverage Level
Avg. Farm Size in State vs Avg. Coverage Level Chosen $6.50 $6.00 $5.50 $5.00 $4.50 $4.00
Average 2014 Milk Production Per Farm For 33 states with avg. farm production lower than 5 million lbs.
15
Average Coverage Level
Avg. Farm Size in State vs Avg. Coverage Level Chosen $6.50 $6.00 $5.50 $5.00 $4.50 $4.00 -
20,000,000
40,000,000
60,000,000
80,000,000
Average 2014 Milk Production Per Farm 16
YOY growth, mil lbs
Milk Production Growth Still Strong in the EU 3,500 2,500 1,500 500 (500) (1,500) (2,500) Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May 2013 European Union
2014 New Zealand
2015 USA
17
Source: DMI Monthly Sales and Insights Report, September 2015
USD/cwt
Aug 2015 as bad as Apr 2009 in Europe and New Zealand 30.00 25.00 20.00 15.00 10.00 5.00 0.00
NZ Apr-09
EU Mar-14
US Aug-15
Most recent farm-gate milk prices in New Zealand and European Union resemble 2009. 19
Dairy Risk Management Instruments in the EU
20
US: A Tale of Two Regions
21
MN Milk Price Basis: Mailbox Milk Price - Class III Milk Price $2.00
1.90
1.94
1.95
1.94 1.85
1.76
$1.80 $1.60
1.55 1.37
$1.40 $1.20 $1.00 2012
2013
2014
Jan-15 Feb-15 Mar-15 Apr-15 May-15
IA Milk Price Basis: Mailbox Milk Price - Class III Milk Price $2.50
2.36 2.18
$2.00 $1.50
1.65
1.52
1.4 1.18
$1.00
0.84 0.46
$0.50 $0.00 2012
2013
2014 Jan-15 Feb-15 Mar-15 Apr-15 May-15
Feed is Cheap Again… $16.00 $14.00 $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $0.00 2000
2002
2004
Corn
2006
2008
Soybean Meal
2010
2012
Alfalfa Hay
2014 24
Jul-15
Jan-15
Jul-14
Jan-14
Jul-13
Jan-13
Jul-12
Jan-12
Jul-11
Jan-11
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
$/cwt
Cull Cow Prices Are High $130
$120
$110
$100
$90
$80
$70
$60
$50
$40
25
Dairy Products Price Trends $3.00 $2.50 Butter
$2.00
Cheddar
$1.50
WPC34
$1.00
Dry Whey
$0.50
Lactose Sep-15
Feb-15
Jul-14
Dec-13
May-13
Oct-12
Mar-12
Aug-11
Jan-11
Jun-10
Nov-09
Apr-09
Sep-08
Feb-08
Jul-07
$0.00
MPP-Dairy Margin Forecast
Forecast on September 30, 2014
Forecast on October 15, 2015
28
How to make a well-reasoned risk management decision?
Implied Subsidies IOFC Basis Required MPP Margin To Breakeven
Other Operating Costs
Optimal MPP Coverage Level
Loss Tolerance
29
How to make a well-reasoned risk management decision?
Implied Subsidies IOFC Basis Required MPP Margin To Breakeven Other Operating Costs
Optimal MPP Coverage Level
Loss Tolerance
30
New Approach to Dairy Risk Management: Robustness FRAGILE – If your farm would have serious problems surviving a major downturn in profit margins. ROBUST – If your financial position and cost of production allow you to withstand a very large and prolonged unexpected downturn in profit margins. ANTIFRAGILE – If your farm benefits from milk and feed price volatility. For example, if you have very strong financial position, low cost of production, and have protected against downside in margins. Then as your competitors go out of business, you will have an opportunity to buy their farm at a great price. 31
New Approach to Dairy Risk Management: Robustness The goal today is to give you a tool to answer one key question:
Is my farm fragile or robust? To answer that question, you need to: 1) Know your farm (costs of production, financials) 2) Execute a ruthless stress-test analysis
32
Fragile or Robust? Decision-Making Flowchart Profitability: How much money will I lose if the next year turns out to be unexpectedly really bad? Liquidity: Will my working capital suffice to cover those losses or will I have to take on more debt?
Solvency: If I have to take on more debt, will my lenders want to lend it to me? 33
MPP-Dairy Advanced Tool
MPP-Dairy Advanced Tool: Input Panel
Your Farm Profile Stress-test outlook scenario 35
MPP-Dairy Advanced Tool: Results Panel
36
MPP-Dairy Case Studies: B & K Dairy Bob wanted to return to the farm and his parents wanted to sell him the cows. The plan was to purchase the cows from his parents, rent the land and lease the machinery from his parents. Bobs folks did a contract on the cows with payments coinciding with the sale of cull cows over the next 4 – 5 years. He felt is likely that many of the cow would be turned over during the 4 -5 year period. Bob and Kittie were married two years ago. Since taking over the operation the milk production has improved and pregnancy rates have skyrocketed in to the mid upper 20’s. Stray Voltage has been identified and cause a number of abortions and loss of cows due to the environmental stress. That is an ongoing process in their pursuit of high production and quality genetics. 37
MPP-Dairy Case Studies: B & K Dairy – Balance Sheet Assets Current Assets Intermediate Assets Long Term Assets Total Assets
Liabilities & Equity $324,254 $762,124 $50,109 $1,136,487
Current Liabilities Intermediate Liabilities Long Term Liabilities Total Liabilities Equity
$133,868 $430,767 $0 $564,635 $571,852
38
B & K Dairy: MPP-Dairy Stress-Test Tool - Getting Started…
• Your own IOFC Margin + Other Revenue must be higher than your own non-feed expenses for you to break even. That’s why we need non-feed expenses. • Basis is defined as your own IOFC Margin minus MPPDairy Margin. If basis is positive, your milk price is higher, or your feed costs are lower than MPP-D, or both.
39
MPP-Dairy Stress-Test Tool: Financials
Working capital per cow: Any losses will first be absorbed by cash reserves or by utilizing operating lines of credit. Debt-to-Asset Ratio: If losses are deep and cannot be absorbed by working capital, long-term debt will be increased. Assets Per Cow: Farms with more land will be able to spread losses over more assets. 40
MPP-Dairy Stress-Test Tool: Risk Management
Some common question include: • Tool assumes CME & other are hedged as futures or forwards on both milk and feed, i.e. that your own IOFC margin is “locked” in the percent hedged.
41
Stress-Test Tool: What-If Scenarios (Be Ruthless!)
You can adjust the milk prices for 2016 lower or feed costs higher and see how your farm performs under a stress-test scenario. 42
What should Bob and Kittie Do?
43
MPP-Dairy Case Studies: Crosswind Holsteins Crosswind Holsteins (Rita and Kirk Stedleaf) have owned and operated their farm since 1987 after farming with Rita’s father for five years. They are both 55 and have three adult children who do not farm with them. They have one full time employee and two part time employees. They own 330 acres of land with a real estate loan of $141,000 on their most recent parcel acquisition in 2011. Rita and Kirk are currently producing their own feed and market a small amount of grain. They would like to farm for five to ten more years and then transition to one of their children or someone outside of the family. 44
MPP-Dairy Case Studies: B & K Dairy – Balance Sheet Assets Current Assets Intermediate Assets Long Term Assets Total Assets
Liabilities & Equity $242,106 $566,433 $1,381,024 $2,189,563
Current Liabilities Intermediate Liabilities Long Term Liabilities Total Liabilities Equity
$64,007 $11,756 $141,068 $216,831 $1,972,732
45
Crosswind: MPP-Dairy Stress-Test Tool - Getting Started…
• Your own IOFC Margin + Other Revenue must be higher than your own non-feed expenses for you to break even. That’s why we need non-feed expenses. • Basis is defined as your own IOFC Margin minus MPPDairy Margin. If basis is positive, your milk price is higher, or your feed costs are lower than MPP-D, or both.
46
Crosswind Holsteins: MPP-Dairy Stress-Test Tool: Financials
Working capital per cow: Any losses will first be absorbed by cash reserves or by utilizing operating lines of credit. Debt-to-Asset Ratio: If losses are deep and cannot be absorbed by working capital, long-term debt will be increased. Assets Per Cow: Farms with more land will be able to spread losses over more assets. 47
What should Rita and Kirk Do?
48
New Approach to Dairy Risk Management: Robustness FRAGILE – If your farm would have serious problems surviving a major downturn in profit margins. ROBUST – If your financial position and cost of production allow you to withstand a very large and prolonged unexpected downturn in profit margins. ANTIFRAGILE – If your farm benefits from milk and feed price volatility. For example, if you have very strong financial position, low cost of production, and have protected against downside in margins. Then as your competitors go out of business, you will have an opportunity to buy their farm at a great price. 49
MPP-Dairy Update and Dairy Outlook for 2016 October 2015
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
