Farm Bill Margin Insurance: Is It Worth It? Dr. Marin Bozic Elite Dairy Producers Conference Las Vegas, November 12, 2013

Farm Bill Margin Insurance: Is It Worth It?

Dr. Marin Bozic

Elite Dairy Producers ConferenceLas Vegas, November 12, 2013

Markets Red in Tooth and Claw

1 21 41 61 81101

121141

161181

201221

241261

281301

321341

361381

4010

5

10

15

20

25

IOFC Margins Feed Prices All-Milk Prices

U.S

Dai

ry IO

FC M

argi

n, /

cw

t

Private Risk Markets Up To Task?

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

0

50000

100000

150000

200000

250000

300000

All Dairy Futures & Options Open Interest

Con

tracts

Many Faces of Risk Management

Many Faces of Risk Management

Source: Dr. Mark Stephenson, University of Wisconsin-Madison

Prices Are Not Predictable, Risk Is

Two Roads Diverged in a Yellow Wood…

Farm Bill Dairy Margin

• All-Milk (/cwt)

- 1.0728 x Corn (/bu)

- 0.00735 x Soybean meal (/ton)

- 0.0137 x Alfalfa hay (/ton)

• Feed ration per cwt of milk: • 30 pounds of shell corn, • 106.4 pounds of corn silage, • 14.7 pounds of soybean meal• 27.4 lbs of alfalfa hay

Farm Bill Dairy Margin 2000-2013

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Jan-

13$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

Farm bill Dairy MarginCoverage Level

Senate House

<4mil 4mil+ <4mil 4mil lbs+

4.00 0.00 0.00 0.00 0.03 4.50 0.01 0.02 0.01 0.045 5.00 0.02 0.04 0.02 0.066 5.50 0.035 0.10 0.035 0.11 6.00 0.045 0.15 0.045 0.185 6.50 0.09 0.29 0.09 0.29 7.00 0.40 0.62 0.18 0.38 7.50 0.60 0.83 0.60 0.83 8.00 0.95 1.06 0.95 1.06

Consecutive Two-Month

Periods 2012Two-month

Average

January 7.57

February 5.82 6.70

March 4.94

April 4.26 4.60

May 3.41

June 3.51 3.44

July 2.74

August 2.98 2.86

September 5.51

October 7.28 6.39

• Calendar year is divided into six consecutive two-month periods

• Average margin must be below the purchased coverage level in order for indemnities to be due.

When Will Margin Insurance Pay Out?

Senate:• Free $4.00: 80% of Milk Production Before

Farm Bill (the highest of the last 3 years)

• $4.50-$8.00: Up to 90% of last year’s production

House:• Up to 80% of the highest annual production over

the last 3 years.

No Absolute Limits On Insurable Milk

How Subsidized is Margin Insurance?

Crop Revenue Protection

Coverage Subsidy

50% 67%

55% 64%

60% 64%

65% 59%

70% 59%

80% 48%

85% 38%N/A N/A

N/A N/A

Dairy Producer Margin Insurance Program

(HR 2642)Coverage First 4

Mil lbsAbove

$4.00 $0.000 $0.030

$4.50 $0.010 $0.045

$5.00 $0.020 $0.066

$5.50 $0.035 $0.110

$6.00 $0.045 $0.185

$6.50 $0.090 $0.290

$7.00 $0.180 $0.380

$7.50 $0.600 $0.830

$8.00 $0.950 $1.060


Farm Bill (the highest of the last 3 years)• $4.50-$8.00: Up to 90% of last year’s production

House:• Up to 80% of the highest annual production over the

last 3 years.

Dairy Producer Margin Insurance

Program (HR 2642)

Crop Revenue

ProtectionCovera

geCoverage as

% of Avg. Margin

Coverage

$4.00 48% 50%$4.50 55% 55%$5.00 61% 60%$5.50 67% 65%$6.00 73% 70%$6.50 79% 80%$7.00 85% 85%$7.50 91% N/A$8.00 97% N/A



Farm Bill (the highest of the last 3 years)• $4.50-$8.00: Up to 90% of last year’s production

House:• Up to 80% of the highest annual production over the

last 3 years.


Dairy Margin Insurance (House) Crop Revenue Protection

Coverage

Premiums (Over 4 mil

lbs)

Expected 2007-2013

Payout

Expected 2007-

2013 Subsidy

Coverage

Subsidy

$4.00 $0.030 $0.05 40% 50% 67%$4.50 $0.045 $0.08 45% 55% 64%$5.00 $0.066 $0.13 48% 60% 64%$5.50 $0.110 $0.19 42% 65% 59%$6.00 $0.185 $0.27 33% 70% 59%$6.50 $0.290 $0.39 25% 80% 48%$7.00 $0.380 $0.53 28% 85% 38%$7.50 $0.830 $0.70 -18% N/A N/A$8.00 $1.060 $0.91 -16% N/A N/A

Based on Newton, J.C. (2013)

A Game: What Would You Choose?


YearPounds shipped

-3 30 mil-2 35 mil-1 40 mil1 43 mil2 44 mil3 45 mil4 50 mil5 55 mil

Year 1: Information Set




Year 1: Expected Return at Enrollment Date

Coverage Level

Fees & Premiums

Expected Indemnity

Expected Net Revenue

$4.00 $0.03 $0.01 -$0.01$4.50 $0.04 $0.02 -$0.02$5.00 $0.06 $0.04 -$0.02$5.50 $0.10 $0.06 -$0.04$6.00 $0.17 $0.10 -$0.07$6.50 $0.27 $0.15 -$0.11$7.00 $0.36 $0.23 -$0.12$7.50 $0.80 $0.34 -$0.47$8.00 $1.05 $0.47 -$0.58






Year 2: Expected Return at Enrollment Date

Coverage Level

Fees & Premiums

Expected Indemnity

Expected Net Revenue

$4.00 $0.03 $0.21 $0.18$4.50 $0.04 $0.35 $0.31$5.00 $0.06 $0.54 $0.48$5.50 $0.10 $0.78 $0.67$6.00 $0.17 $1.04 $0.87$6.50 $0.27 $1.33 $1.07$7.00 $0.36 $1.65 $1.29$7.50 $0.80 $1.98 $1.18$8.00 $1.05 $2.33 $1.28



Dairy Margin Insurance (House)

Coverage

Premiums (Over 4 mil

lbs)

Expected 2007-2013

Payout

Expected 2007-

2013 Subsidy

2009 Expecte

d Payout

2009 Expecte

d Subsidy

$4.00 $0.030 $0.05 40% $0.21 86%$4.50 $0.045 $0.08 45% $0.35 87%$5.00 $0.066 $0.13 48% $0.54 88%$5.50 $0.110 $0.19 42% $0.78 86%$6.00 $0.185 $0.27 33% $1.04 82%$6.50 $0.290 $0.39 25% $1.33 78%$7.00 $0.380 $0.53 28% $1.65 77%$7.50 $0.830 $0.70 -18% $1.98 58%$8.00 $1.060 $0.91 -16% $2.33 54%


In The Long Run, No One Has a Clue



Corn Growing Phases

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Planting Starts

Germination, Vegetation

Silking Starts

Blistering, Milking, DoughGrain Fill

Harvest Starts

Killing Frost Ends Growth

Dairy Market Stabilization Program

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

7%USA Year-on-Year Milk Production Growth

2008-2013

Dairy Market Stabilization Program

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

7%USA Year-on-Year Milk Production Growth

2008-2013

Not Likely to Curb Long-Run Growth


DMSP Could Reduce Policy Cost


DMSP Could Reduce Policy Cost


DMSP Could Accelerate Margin Recovery

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%


What are the DMSP Penalties?

– If margins were $5.00-$6.00:• 98 percent of stabilization base• 94 percent of the marketings of milk

– If margins were $4.00-$5.00• 97 percent of stabilization base• 93 percent of the marketings of milk

– If margins were less than $4.00• 96 percent of stabilization base• 92 percent of the marketings of milk

A Simple Numerical Example

2013 Expected production: 91,618 cwtHappy IOFC margin: $8.00/cwtHappy IOFC revenue: $732,944

Basic Production History: 89,821 cwtAnnual Production History: 89,821 cwt

Bad memories: 2009 IOFC margin: $4.522012 IOFC margin: $5.31


What would $6.50 coverage level mean under different margin scenarios if we get DSA

Average Annual Simulated

Margin

Probability DMSP Price Boost

Shortfall for NON-

PARTICIPATING farm*

Less than $5.00 1.46% 88,620 -311,509

$5.00-$6.00 10.66% 71,405 -214,702$6.00-$7.00 38.88% 41,191 -134,956$7.00-$8.00 30.06% 17,377 -50,761Over $8.00 18.94% 5,458 69,932


What would $6.50 coverage level mean under different margin scenarios if we get DSA

Average Annual

Simulated Margin

Shortfall for NON-

PARTICIPATING farm

Premium for $6.50

coverage

Average Realized

Indemnity

DMSP Penalty

Shortfall for

PARTICIPATING

farm

Less than $5.00

-311,509 -13,803 153,669 -23,881 -195,524

$5.00-$6.00 -214,702 -13,803 81,760 -14,348 -161,092

$6.00-$7.00 -134,956 -13,803 39,107 -7,807 -117,460

$7.00-$8.00 -50,761 -13,803 17,565 -4,267 -51,266

Over $8.00 69,932 -13,803 7,141 -2,195 61,074


What would $6.50 coverage level mean under different margin scenarios if we get G-S

Average Annual

Simulated Margin

Probability Shortfall for NON-

PARTICIPATING

Premium for $6.50

Indemnity Shortfall for

PARTICIPATING farm

Less than $5.00

8.86% -329,350 -14,439 151,244 -192,544

$5.00-$6.00 19.96% -222,392 -14,439 75,181 -161,650

$6.00-$7.00 29.68% -136,595 -14,439 33,145 -117,889

$7.00-$8.00 23.98% -49,389 -14,439 13,083 -50,744

Over $8.00 17.52% 71,576 -14,439 5,342 62,480


Subsidies and Mailbox vs All-Milk price

Map created by Newton, Thraen and Bozic

Policy Risk:Looking Inside Out vs. Looking Outside In

Final Thoughts

Once the Farm Bill is passed and USDA issues the rules on annual enrollment processes, a new tool will be posted on dairy.wisc.edu where you will be able to enter your own production and price data and estimate if the new farm bill dairy programs would work for you.

Please fill the survey now to help us estimate the participation rate. The results will be presented this afternoon just before the relocation panel.

Sources and References

The analytical results presented here are based on a research project led by Dr. Cameron S. Thraen and John C. Newton, the Ohio State University.

Primary reference: Newton, John C. Policy Options for a Modern Dairy Economy, Ph.D. Dissertation, Copyright The Ohio State University 2013.

Farm Bill Margin Insurance – Is it Worth it?

Elite Dairy Producers ConferenceNovember 12, 2013

Dr. Marin [email protected] of Applied EconomicsUniversity of Minnesota-Twin Cities317c Ruttan Hall1994 Buford AvenueSt Paul, MN 55108

http://marinbozic.info

mailto:[email protected]

Documents

Farm Bill Margin Insurance: Is It Worth It? Dr. Marin Bozic Elite Dairy Producers Conference Las Vegas, November 12, 2013