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http://amap.missouri.edu
Farm Bill/Dairy Policy
February 26, 2014Dairy Gross Margin, LLC
Dr. Scott BrownAgricultural Markets and PolicyDivision of Applied Social Sciences
The Long Road To A Farm Bill Ends
August 2011 - The Budget Control Act of 2011 was passed. April 26, 2012- The Senate Agriculture Committee passes a Farm Bill.June 21, 2012- The Senate passes a Farm Bill.July 12, 2012- The House Agriculture Committee passes a Farm Bill.December 31, 2012- The Farm Bill is Extended for One Year.May 14, 2013- The Senate Agriculture Committee passes a Farm Bill.May 15, 2013- The House Agriculture Committee passes a Farm Bill.June 10, 2013- The Senate passes a Farm Bill.June 20, 2013- The Farm Bill fails on the House floor.July 11, 2013- The House passes a “Farm Only” Farm Bill.September 19, 2013- The House passes a nutrition bill.January 29, 2014- The House passes a Farm Bill conference report.February 3, 2014- The Senate passes a cloture motion on the Farm Bill conference report.February 4, 2014- The Senate passes the Farm Bill conference report.February 7, 2014- President Obama signs the Farm Bill conference report.
Source: Modified from farmpolicy.com
A Fundamental Change In Dairy Policy
New farm bill dairy provisions give a new level of flexibility for dairy producers
Program flexibility requires additional homework for producers to optimize their participation in the program
MILC gives way to new program flexibility No production caps Coverage quantity and margin level has flexibility
Pay particular attention to the final language Dairy policy evolved in the last few weeks Some important changes relative to earlier versions
USDA Rulemaking Will Be Critical
The exact operation of the new farm bill depends on USDA interpretation of the legislative language.
Major Dairy Provisions in AA2014 Creates a 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
When Will The Margin Program Begin?
USDA must begin the program no later than September 1, 2014
Difficult for USDA to start earlier than that date Suggests signup will have to occur in the
July/August timeframe Begin your selection process now as signup will
likely be up against the deadline $100 registration fee gets $4.00 margin coverage Margin payments will occur on a bimonthly basis
beginning with January/February
National Program Margin Calculation
All Milk Price less Feed Cost The average cost of feed for a dairy operation required to
produce a Cwt. of milk, determined in accordance with the following formula: [1.0728 x price of corn/bu.] + [0.00735 x price of soybean meal/ton] + [0.0137 x price of alfalfa hay/ton].
Milk, corn and alfalfa prices reported in Agricultural Prices; soybean meal price is Central Illinois, USDA/AMS
The calculation required by this subsection shall be made as soon as practicable using the full-month price of the applicable reference month. A lag in information, the January all milk price released at
the end of February It will take USDA time to process payments
Feed Costs From NMPF’s Original Work With One Modification
Historical Monthly U.S. Margin
19971998200020022004200520072009201120120
2
4
6
8
10
12
14
16
$ p
er
cwt
Hoard’s Webinar – Percentage of Producer Participation
Less Than 25 Percent
25 to 50 Percent
50 to 75 Percent
Greater Than 75 Percent
0 5 10 15 20 25 30 35 40 45
12
31
40
16
Percentage
Producers Should Calculate Their Own Margin
It is important to know how your margin changes over time relative to the national margin
The higher the correlation between a producer’s margin and the national margin the better the safety net
I have heard, “I am not participating because my margin is different than the national margin.”
My response, “The level doesn’t matter as much as the month to month movements. Are you sure about participation?”
Take the time to do the comparison! Change the mentality to insurance versus program
maximization
Producers Will Be Assigned A Production History
Highest annual milk marketings during 2011, 2012 or 2013.
USDA will adjust production history annually to reflect an increase in U.S. milk production
An operation’s marketings growth does not matter in the adjustment to production history
New dairy operations Volume of actual milk marketings extrapolated to
a yearly amount Estimated from herd size
A 2 Million Pound Production History Producer And Annual U.S. Milk Production Grows by 2% Annually
Production History
2015 2016 2017 20180.00
0.50
1.00
1.50
2.00
2.50
Million P
ounds
Higher Premiums At Higher Margin Coverage Levels
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.)
Hoard’s Webinar – Best Margin Level
$4
$4.00 - $5.50
$5.50 - $6.50
$6.50 - $7.50
$8.00
0 5 10 15 20 25 30 35 40 45
14
20
39
21
7
11
39
27
17
6
> 4 million pounds < 4 million
Percentage
Compare The Added Cost For Each $0.50 Of Additional Margin Protection
* - 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.
$0.54 increase in premiumFor $0.50 more margin coverage
Selection of Coverage Percentage
A producer can choose to cover 25 to 90 percent of their production history in 5 percent increments annually
Creates interesting tradeoffs between coverage level and coverage quantity If you expect low margins, high coverage level and
quantity If you expect high margins
Reduce coverage level Reduce coverage quantity Reduce both Reduce neither
Hoard’s Webinar – Annual Adjustment
Never Change Either
Adjust Coverage Level Only
Adjust Coverage Quantity Only
Adjust Both
0 10 20 30 40 50 60
9
26
9
57
Percentage
How Much Risk Can Your Operation Afford?
$4.00
$8.00
$6.00
25% 90%60%
Greater Protectio
n at a greater c
ost
Coverage Quantity
Covera
ge L
evel
Dairy Product Donation Program
Must be operational no later than 120 days after the margin program begins
When the margin is less than $4.00 for the two preceding months, this feature becomes operational
Secretary purchases dairy products at prevailing market prices and distributes to public and private nonprofits assisting low-income households
This program suspended: After three months of operation Margins move above $4.00 Margins between $3.00 and $4.00 AND U.S. prices exceed world
prices by more than 5% Margins less than $3.00 AND U.S. prices exceed world prices by
more than 7%
Hoard’s Webinar – Dairy Product Donation Program Large Purchases
Yes
No
Implementation
0 10 20 30 40 50 60
24
23
53
Percentage
USDA Regulations Will Clarify Program Operation
Do I get payments on production history even if I don’t produce that amount?
Premium rates for those over 4 million pounds of production history
There will be other USDA interpretations that will make a difference
Summary
Do not forget that how other producers choose to participate should affect your choice Large participation means low margins remain
longer Small participation means many producers see full
market effects of low margins This is a large change in dairy policy
Spend time thinking how your operation should participate
If your operation can not afford risk increase coverage
Each operation is unique