2014-15 DAIRY SITUATION AND OUTLOOK Christopher A. Wolf Agricultural, Food and Resource Economics Michigan State University October 29, 2014

HIGHLIGHTS OF LAST YEAR

• All time high cash butter price

• Highest milk price over feed margins

• Large production responses

• Major new dairy policy

ADD CLASS IV MILK PRICE GRAPH

SEPTEMBER MILK PRODUCTION NUMBERS

• US : 9.2767 million milk cows; +4.0% milk production; +3.4% milk/cow

• Michigan: 395,000 milk cows;

+6.9% milk production; +3.1% milk/cow

• CA +2.9% milk production; same cows • WI +3.2% milk production; same cows

MAY-JUL 2014 INTERNATIONAL MILK

PRODUCTION SITUATION • US +2.4% over 2013 • EU +4.2% • NZ +18.4% • Australia +6.2% • Argentina -6.0% • Brazil +13.8%

$2.14

$1.92

Note: Oceania at $1.79

$1.81

Note: Oceania at $1.32

Dairy Provisions of the Agricultural Act of 2014

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REPEALED

• Milk Income Loss Contract Program

• Dairy Product Price Support Program

• Dairy Export Incentive Program

• Dairy Forward

Pricing Program

• Dairy Price Support Program (“dairy cliff”)

• Livestock Gross Margin for Dairy Cattle

CREATED

• Margin Protection Program for Dairy Producers

• Dairy Product Donation Program

• Potential California Federal Order

THE MARGIN PROTECTION PROGRAM

• Voluntary program based on U.S. income-over-feed-cost margin

• Makes payments when the avg. difference between the US All-Milk price and a national feed ration index falls below the user-selected coverage option

• Protects dairy producers from severe downturns in the milk price, rising livestock feed prices, or both

• No production or payment limitations

ELIGIBILITY REQUIREMENTS

• Must have commercial milk marketed or sold in US

• The owners must be US citizens or legal resident aliens (green card holders)

• Must certify compliance with conservation

provisions

• If the operation participated in MILC then it met these requirements

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MPP-Dairy: Four Key Elements

1. Actual Dairy Production Margin

2. Production History

3. Covered Production History (%)

4. Coverage Levels & Premiums ($/cwt)

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Actual Dairy Production Margin

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• Approximates milk revenue over all feed costs on the farm • Single, national formula, that cannot be customized

Actual Dairy Production Margin = U.S. All-Milk Price - 1.0728 x NASS Corn Price ($/bu) - 0.00735 x AMS Soybean Meal (Central IL) ($/ton) - 0.0137 x NASS Alfalfa Hay ($/ton)

Based on 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 pounds of alfalfa hay

MARGIN CALCULATIONS FOR 2014

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Period ALL MILK Price

CORN Price

SBM Price (AMS-C. IL)

ALFALFA HAY Price FEED Cost

MILK- FEED

Margin

$/cwt. $/bu. $/ton $/ton $/cwt. $/cwt. 2014.01 $23.50 $4.42 $479.54 $185.00 $10.80 $12.70 2014.02 $24.90 $4.35 $409.25 $188.00 $10.25 $14.65

Jan/Feb $13.68

2014.03 $25.20 $4.51 $497.82 $191.00 $11.11 $14.09 2014.04 $25.30 $4.71 $514.01 $206.00 $11.65 $13.65

Mar/Apr $13.87

2014.05 $24.20 $4.71 $519.38 $224.00 $11.94 $12.26 2014.06 $23.30 $4.37 $501.79 $222.00 $11.42 $11.88 May/Jun $12.07

Actual Dairy Production Margin: Historical

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0.002.004.006.008.00

10.0012.0014.0016.00

Average Margin 2007-2014: $8.13

Actual Production History and Covered Production History

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• Actual Production History is the highest amount of milk marketed by the operation in 2011, 2012, or 2013

• Each year of participation, an operation’s production history will increase based on national growth in milk production.

• Each year, producers may choose coverage

percentage of 25% to 90% of their production history, in 5% increments.

MARGIN PROTECTION COVERAGE LEVELS AND PREMIUMS: 2014 - 2015

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Margin

Coverage Level ($/cwt)

Discounted Premium*

≤ 4 million lbs ($/cwt)

Premium > 4 million

lbs ($/cwt)

$4.00 $0.000 $0.000 $4.50 $0.0075 $0.020 $5.00 $0.01875 $0.040 $5.50 $0.030 $0.100 $6.00 $0.04125 $0.155 $6.50 $0.0675 $0.290 $7.00 $0.1625 $0.830 $7.50 $0.225 $1.060 $8.00 $0.475 $1.360

* The discounted premium applies to sign-ups in 2014 and 2015.

MARGIN PROTECTION COVERAGE LEVELS AND PREMIUMS: 2016-18

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Margin

Coverage Level ($/cwt)

Premium ≤ 4 million

lbs ($/cwt)

Premium > 4 million

lbs ($/cwt)

$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

Are the MPP-Dairy Premiums a good deal?

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Expected Margins Near Historical

Average

Depends on options and risk

attitudes.

Expected Margins Much Above

Historical Average

MPP Premiums are expensive.

Expected Margins Much Below

Historical Average

MPP Premiums are cheap.

PREMIUM AND PAYMENT TIMING

• Premium payments have 2 alternatives: • 100% at sign-up; or • 25% min. by end of Feb., remainder by June 30th

of insured year

• Preliminary NASS prices reported at end of month. Revised final values issued at end of following month. MPP-Dairy uses final values

• Producers are always paid for 1/6th of the covered

amount when a payment is triggered in a bi-monthly period

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WHEN ARE PAYMENTS TRIGGERED? (2013) Consecutive Two-Month Margin 2013

Two-Month

Average

Coverage Level & Payments

$4.00 $6.50 January 6.29 February 5.72 6.01 0.00 0.49 March 5.24 April 6.00 5.62 0.00 0.88 May 5.77 June 5.36 5.56 0.00 0.94 July 4.85 August 6.68 5.77 0.00 0.73 September 7.97 October 9.85 8.91 0.00 0.00 November 11.04 December 11.04 11.04 0.00 0.00

OTHER MPP ISSUES • Can participate in LGM-Dairy or MPP not both

• Sign up for 2014 (last 4 months) and 2015 September 2 through November 28, 2014

• Sign up for 2016 and subsequent years will take place July 1 through September 30 of the preceding year

• Once a producer signs up for MPP, they are committed to at least the $4/cwt level in future years • Higher coverage levels can be selected but $4/cwt

is used if no coverage is selected • Note this also means the $100 administrative fee

will apply in future years 36

DMAP MPP WEBSITE

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http://dairymarkets.org/MPP

10/28/14 Class III Class IV Class III All Milk

Futures market USDA

Oct 23.90 21.80

Nov 21.28 17.62

Dec 2014 19.11 17.00

17.25-18.15

18.95-19.85

Jan 2015 18.08 16.85

Feb 17.33 16.66

Mar 17.10 16.42

Apr 16.93 16.38

May 16.91 16.45

Jun 17.04 16.59

Jul 17.06 16.96

Aug 17.30 16.95

Sep 17.38 17.19

16

16.5

17

17.5

18

18.5

19

19.5

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2015 MI Mailbox Forecast

FACTORS TO WATCH Bullish • Butter and cheese

inventories remain low

• Drought in West continues

• High beef prices encourage culling

• Strengthening US economy

Bearish • US prices not

competitive • US dollar rising • Low feed prices • EU production quotas

ending • Russian purchases cut

off • Slowing Chinese

purchases • EU quotas ending

SUMMARY • Milk prices (and margins) will be lower

• Cash butter and cheese prices declined in last

week indicating Holiday demand concerns about stocks are diminishing

• US dairy exports are down and dairy imports are up

• “Market correction” to align prices with world prices might be messy