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Dairy Programs in the 2013 Farm Bill What can we learn from crop insurance?. Dr. Marin Bozic University of Minnesota Prepared for MN Dairy Leaders Roundtable June 3, 2013 Arden Hills, MN. Our group…. John Newton Cameron Thraen Mark Stephenson Brian Gould Chris Wolf Marin Bozic - PowerPoint PPT Presentation
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Dairy Programs in the 2013 Farm BillWhat can we learn from crop insurance?
Dr. Marin BozicUniversity of Minnesota
Prepared for MN Dairy Leaders Roundtable
June 3, 2013 Arden Hills, MN
Our group…
John Newton Cameron Thraen Mark Stephenson Brian Gould Chris Wolf Marin Bozic
http://aede.osu.edu/dairybriefing
New face of volatility: Income-over-feed-costs margin risk
Designing new dairy safety net
Dairy Market Stabilization Program: When margins are critically low, provides temporary
disincentives to milk production growth.
Dairy Producer Margin Protection Program: Hybrid between countercyclical payments program
and subsidized margin insurance program.
Dairy Market Stabilization Program
-
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00 $/cwt
Average Annual
Simulated Margin
DSA – if DSMP is Highly Effective
Goodlatte-Scott
How much more likely is
scenario under G-S?
Less than $5.00 1.46% 8.86% 6.1$5.00-$6.00 10.66% 19.96% 1.9 $6.00-$7.00 38.88% 29.68% 0.8 $7.00-$8.00 30.06% 23.98% 0.8 Over $8.00 18.94% 17.52% 0.9
Based on margins forecasted with January 15, 2013 data.Elasticity of Demand: -0.20 Milk Volume Participation: 75%
If, effective, DMSP could indeed accelerate margin recovery
DMSP: Stabilization base for a growing dairy
Importance and Fragility of Dairy Exports
• U.S. dairy exports now consume one day worth of milk production per week.
• Over the last 10 years, over half of the growth in U.S. milk production was exported.
• Over the last 5 years, over two thirds of the growth in U.S. milk production was exported.
Milk yield per cow in NZ is highly volatile due to pasture-based production system. That means that we should anticipate large swings in U.S. milk prices in the coming decade.
Pro and contra stabilization program
Why it might be a good idea: It could reduce government costs. It could accelerate margin recovery in low-margin states of the
world. Does not present a long-term obstacle for milk production
growth, even for farms with aggressive growth plans
Why it might not be such a good idea: Creative private contracts could reduce effectiveness. Interference with spatial structural changes Slippery Slope argument: What will happen in 2018 Farm Bill?
Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
$16.00
Basic Margin Protection
Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
$16.00
Supplemental Margin Protection: $6.50 Coverage Level
What can we learn from crop insurance?
Yield: Individual historical yield.
Price: Expected harvest price is the average December's futures contract prices during February.
Coverage Level
Actual Production
History
Crop Revenue Coverage
Protects: Individual Yield
Individual Revenue(yield x price)
CAT 100%50% 67% 67%55% 64% 64%60% 64% 64%65% 59% 59%70% 59% 59%75% 55% 55%80% 48% 48%85% 38% 38%
What can we learn from crop insurance?
Principle: decide before you plant; pay when you harvest.
Supplemental Margin Protection – Premiums for Production over 4 million lbs
Coverage Level Senate 2013 House 2013 Dairy
Freedom Act$4.00 $0.00 $0.00 $0.03 $4.50 $0.02 $0.02 $0.05 $5.00 $0.04 $0.04 $0.07 $5.50 $0.10 $0.08 $0.11 $6.00 $0.15 $0.16 $0.19 $6.50 $0.29 $0.23 $0.29 $7.00 $0.62 $0.43 $0.38 $7.50 $0.83 $0.59 $0.83 $8.00 $1.06 $0.92 $1.06
Premiums are fixed for the next five years, but conditions may vary…
Source: Newton, J. NWDEPA 2013
Six beginning-of-year margin scenarios
Dairy programs in the 2013 Farm BillWhat can we learn from crop insurance?
prepared for MN Dairy Leaders Roundtable
Monday, June 3, 2013Arden Hills, MN
Dr. Marin [email protected] of Applied EconomicsUniversity of Minnesota-Twin Cities