http://amap.missouri.edu
TOPMargin: Training on the MPP-
Dairy Program Tool
October 22, 2014
Dr. Scott Brown
Agricultural Markets and Policy
Division of Applied Social Sciences
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
MILC and the New Margin Program
Compared
New Margin Program MILC
Coverage Level Pick $4 to $8 in $0.50
increments
Feed Adjusted $16.94
minus Boston Class I
Coverage Quantity Pick 25% to 90% in
5% increments
34% or 45% applied
to price difference
above
Payments Production history
adjusted by US milk
production growth
Capped – 2.985
million pounds or 2.4
million pounds
Premiums Depends on coverage
level
None
Bimonthly MPP-Dairy Margin – 2015
Current Futures Estimate
$0
$2
$4
$6
$8
$10
$12
$14
$16
Jan/Feb 2000 Jan/Feb 2006 Jan/Feb 2012
$ p
er
cwt
Hoard’s Webinar – Percentage of
Producer Participation
12
31
40
16
0 5 10 15 20 25 30 35 40 45
LESS THAN 25 PERCENT
25 TO 50 PERCENT
50 TO 75 PERCENT
GREATER THAN 75 PERCENT
Percentage
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
Higher Premiums At Higher Margin
Coverage Levels
Coverage
Level
Tier 1
Premium per cwt in 2014
and 2015 for covered
production history at
4 mil lbs or less
Tier 1
Premium per cwt for
2016-2018 for covered
production history at
4 mil lbs or less
Tier 2
Premium per cwt, all
years for covered
production history over
4 mil lbs
$4.00 None None None
$4.50 $0.008 $0.010 $0.020
$5.00 $0.019 $0.025 $0.040
$5.50 $0.030 $0.040 $0.100
$6.00 $0.041 $0.055 $0.155
$6.50 $0.068 $0.090 $0.290
$7.00 $0.163 $0.217 $0.830
$7.50 $0.225 $0.300 $1.060
$8.00 $0.475 $0.475 $1.360
Higher Premiums At Higher Margin
Coverage Levels
Coverage
Level
Tier 1
Premium per cwt in 2014
and 2015 for covered
production history at
4 mil lbs or less
Tier 1
Premium per cwt for
2016-2018 for covered
production history at
4 mil lbs or less
Tier 2
Premium per cwt, all
years for covered
production history over
4 mil lbs
$4.00 None None None
$4.50 $0.008 $0.010 $0.020
$5.00 $0.019 $0.025 $0.040
$5.50 $0.030 $0.040 $0.100
$6.00 $0.041 $0.055 $0.155
$6.50 $0.068 $0.090 $0.290
$7.00 $0.163 $0.217 $0.830
$7.50 $0.225 $0.300 $1.060
$8.00 $0.475 $0.475 $1.360
0.011
0.011
0.011
0.027
0.095
0.062
0.250
0.020
0.060
0.055
0.135
0.540
0.230
0.300
Selection of Coverage Percentage
A producer can choose to cover 25 to 90 percent of their production history in 5 percent increments annually
Bi-monthly base equals annual base divided by 6
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
Participation Depends
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
If We Know The Future…
Suppose bi-monthly margins are $6 every 2015
period
A 4 million pound production history operation should
pick what margin level?
Bimonthly U.S. Margin
$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
$16.00
Jan/Feb 2009 Jan/Feb 2011 Jan/Feb 2013 Jan/Feb 2015
$ p
er
cwt
If We Know The Future…
Suppose bi-monthly margins are $6 every 2015
period
A 4 million pound production history operation should
pick what margin level? ANSWER $8. Payment is $2
with a cost of $0.475
A 10 million pound production history operation should
pick what margin level?
If We Know The Future…
Suppose bi-monthly margins are $6 every 2015
period
A 4 million pound production history operation should
pick what margin level? ANSWER $8. Payment is $2
with a cost of $0.475
A 10 million pound production history operation should
pick what margin level? ANSWER $8. Payment is $2
with a cost of $0.967
If We Know The Future…
Suppose bi-monthly margins are $7.25 every 2015
period
A 4 million pound production history operation should
pick what margin level?
Bimonthly U.S. Margin
$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
$16.00
Jan/Feb 2009 Jan/Feb 2011 Jan/Feb 2013 Jan/Feb 2015
$ p
er
cwt
If We Know The Future…
Suppose bi-monthly margins are $7.25 every 2015
period
A 4 million pound production history operation should
pick what margin level? ANSWER $8. Payment is $0.75
with a cost of $0.475
A 10 million pound production history operation should
pick what margin level?
If We Know The Future…
Suppose bi-monthly margins are $7.25 every 2015 period
A 4 million pound production history operation should pick what margin level? ANSWER $8. Payment is $0.75 with a cost of $0.475
A 10 million pound production history operation should pick what margin level? ANSWER Only cover 40% of PH at $8 because coverage above that level costs $1.36 and the payment is only $0.75
The uncertainty comes because we don’t know the future!
Hindsight Is 20/20
Looking backwards…..
Small producers should have picked $4 or $8
Larger producers should have picked $4, $6.5, $8
Looking forward……
Does not mean the same choices
Premium cost versus safety net
Tool to Optimize Protection
(TOPMargin)
For Dairy Producers Under the MPP
TOPMargin is an Economic Evaluation Tool Developed by the
Agricultural Markets and Policy (AMAP) Group,
University of Missouri
Version 2015.2.09
WEBSITE: http://farmbill.missouri.edu
TOPMargin – Dairy Margin Risk Tool
Based on historical volatility, TOPMargin puts risk
around the expected average margin outcome
Let’s look at a 30,000,000 production history
operation
The Corner Solutions for MPP-Dairy Coverage -
$4/90 – Average Margin $10.87 – 30 Mil. Lbs.
The Corner Solutions for MPP-Dairy Coverage -
$8/90 – Average Margin $10.87 – 30 Mil. Lbs.
A Middle Solution for MPP-Dairy Coverage -
$6/90 – Average Margin $10.87 – 30 Mil. Lbs.
The Corner Solutions for MPP-Dairy Coverage -
$8/90 – Average Margin $7.10 – 30 Mil. Lbs.
The Corner Solutions for MPP-Dairy Coverage -
$8/90 – Average Margin $7.10 – 30 Mil. Lbs.
4.00$ 4.50$ 5.00$ 5.50$ 6.00$ 6.50$ 7.00$ 7.50$ 8.00$
25 0.01 0.03 0.09 0.17 0.28 0.43 0.32 0.49 0.54
30 0.01 0.06 0.12 0.21 0.37 0.52 0.34 0.52 0.57
35 0.03 0.08 0.16 0.25 0.46 0.62 0.35 0.55 0.62
40 0.04 0.09 0.20 0.32 0.54 0.71 0.38 0.58 0.64
45 0.05 0.11 0.22 0.39 0.63 0.79 0.40 0.60 0.67
50 0.07 0.13 0.28 0.45 0.71 0.81 0.42 0.64 0.70
55 0.08 0.16 0.35 0.51 0.76 0.84 0.44 0.66 0.73
60 0.10 0.19 0.40 0.57 0.78 0.86 0.45 0.67 0.75
65 0.12 0.23 0.44 0.64 0.81 0.89 0.47 0.70 0.78
70 0.14 0.28 0.50 0.70 0.83 0.91 0.49 0.72 0.79
75 0.16 0.32 0.54 0.73 0.85 0.93 0.51 0.75 0.83
80 0.18 0.37 0.59 0.75 0.87 0.94 0.52 0.77 0.84
85 0.21 0.39 0.65 0.77 0.89 0.95 0.55 0.79 0.85
90 0.24 0.42 0.69 0.79 0.91 0.97 0.57 0.81 0.86
X < .3 .3 < X < .68 X > .68
2015 Composite MPP Decision (MPP Net Returns, Reduced Margin Volatility, Cat. Margin Reduction and Positive Outcomes)
Margin Level
Pro
du
ctio
n H
isto
ry C
ove
rag
e L
eve
l
Legend:
Summary
Download the tool to think about the alternatives
http://farmbill.missouri.edu
Your ability to handle risk matters
This decision becomes an individual choice – don’t
use the herd mentality to make your choice
