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Dairy Policy Reforms and Advanced Dairy Risk Management Strategies
Dr. Marin Bozic
Vita Plus 2014 Dairy SummitRed Wing, MN, December 10, 2014
Agenda For Today
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1. MPP-Dairy: Time To Decide2. What Will You Do?3. Tools and Resources at Your Disposal4. Is MPP-Dairy Useless Out West?5. IS MPP-Dairy Subsidized?6. What Happens to Supply Dynamics Once MPP Kicks In?7. Outlook for 2015 – Say Cheese (Nobody’s Smiling)
MPP-Dairy: Time to Make a Decision
3
MPP-Dairy signup as of Dec 3:
Texas: 75%
New Mexico: 64%
Nebraska: 46%
Minnesota: 42%
California: 32%
Wisconsin: 30%
Idaho: 18%
Pennsylvania: 16%
Txt surveys on MPP-Dairy
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Txt surveys on MPP-Dairy
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Txt surveys on MPP-Dairy
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Txt surveys on MPP-Dairy
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Resources as you make your decision: 1. The FSA Tool
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http://DairyMarkets.org/MPP/Tool
http://DairyMarkets.org/MPP/Dashboard
Resources for MPP-Dairy Decision: 2. MPP Dashboard
Resources for MPP-Dairy Decision: 3. UMN Online Course
10http://farmbill.umn.edu
Would MPP-Dairy Help Western Dairies?
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• “The situation in California is the worst of both worlds: Its all-milk price is consistently lower than the national average, andits feed costs are consistently higher. As a result; the state'smargin since 2007 has averaged $2.4 7 less than the nationalmargin.”
• “As national margins erode, Western margins will drop lowerbecause they already are lower. Profits will disappear faster.Losses will happen sooner and they will be bigger.”
Hoard’s Dairyman West, September 25, 2014.
MPP-Dairy: Milk Price Basis (Region Minus US All-Milk)
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-2.00
-1.50
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
2007 2008 2009 2010 2011 2012 2013
Upper Midwest Texas Idaho California
MPP-Dairy: Feed Cost Basis (Region Minus MPP Feed)
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-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
2007 2008 2009 2010 2011 2012 2013
Upper Midwest Texas Idaho California
Homegrown feed valued at market prices. Replacement heifers feed costs included.
MPP-Dairy: Milk Income over Feed Costs Margin Basis
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-5.00
-4.00
-3.00
-2.00
-1.00
0.00
1.00
2.00
3.00
2007 2008 2009 2010 2011 2012 2013
Upper Midwest Texas Idaho California
What kind of risk protection do I need?
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Loss Tolerance
Other Operating Costs
Required Farm-level IOFC Margin
IOFC Basis
MPP-Dairy Effectiveness
Other Operating Costs (Excluding Feed, Herd Replacement and Depreciation)
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$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
$9.00
2007 2008 2009 2010 2011 2012 2013
Upper Midwest Texas Idaho California
How much would MPP-Dairy help in a year like 2009?
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-$6.00
-$5.00
-$4.00
-$3.00
-$2.00
-$1.00
$0.00
Upper Midwest Texas Idaho California
20
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Net
Far
m In
com
e Pe
r C
wt
Full Loss Loss after MPP
71% 55% 44% 53%
Max Loss Calculator
Item Value
Non-Feed Costs of Production $7.75
Expected IOFC Basis over MPP in a Bad Year
$2.00
2015 Milk Production Growth over Production History
3%
Coverage Percentage 90%
Percent of 2015 Milk Covered Under MPP 87.4%
Needed MPP IOFC for No Losses $6.58
MPP Coverage Level $5.00
MPP Premiums $0.04
Maximum Losses $1.62
Is MPP-Dairy Subsidized?
$0.00
$0.20
$0.40
$0.60
$0.80
$1.00
$1.20
$1.40
$4.00 $4.50 $5.00 $5.50 $6.00 $6.50 $7.00 $7.50 $8.00
First 4 M lbs PH After 4 M lbs PH
MPP-Dairy Subsidies are Implied in Margin Forecasts
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Expected Margins Near Historical
Average
Modestly Subsidized.
Expected Margins Much Above
Historical Average
Margin Insurance Premiums are Too
Expensive!
Expected Margins Much Below
Historical Average
Margin Insurance Premiums are Very Highly
Subsidized.
Comparing MPP-Dairy vs. CSC’s Revenue over Feed
$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
$16.00
$18.00
2007 2008 2009 2010 2011 2012 2013 2014
USDA MPP-Dairy Margin CSC Revenue over Feed
CSC ROF: Class III Milk – CME Corn – 0.01 CME Soybean Meal
MPP-Dairy: All-Milk – 1.0728* NASS Corn – 0.00735 * AMS Soybean Meal – 0.0137 * Alfalfa Hay
Comparing MPP-Dairy vs. CSC’s ROF Puts
Coverage Level
CSC Revenue over Feed Puts 12/9/2014 USDA
H1 2015 H2 2015
$6.00 $0.26 $0.54 $0.16
$7.00 $0.47 $0.79 $0.83
$8.00 $0.81 $1.12 $1.36
Strikes up to $6.00 are likely to be cheaper through FSA. Strikes above $6.00 are likely to be cheaper from the private sector. Private sector products can be customized. For example, $7.00 Long Put + $10 Short Call costs only $0.11 for 2015 (plus service charge of $0.004/cwt/month).
Source: http://www.aghedgedesk.com/
CSC’s Revenue over Feed 2001/01 – 2014/11
Hedge Front Months for the Show, Hedge Back Months for the Dough!
Txt surveys on MPP-Dairy
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Txt surveys on MPP-Dairy
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Will MPP-Dairy Change the Supply Dynamics?
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Low Margins and Supply Dynamics: Wisconsin
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Nicholson & Stephenson: Simulated MPP Margins 2015-18
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0.00
2.00
4.00
6.00
8.00
10.00
12.00
Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18
$/c
wt
Old Dairy Programs With MPP
Average MPP decreases $0.91/cwt, margin < $8 most of time
Txt surveys on MPP-Dairy
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Cheese Futures for 2015 Tumbling Lower
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$1.45
$1.50
$1.55
$1.60
$1.65
$1.70
$1.75
$1.80
$1.85
$1.90
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2015
Sep '14 Oct '14 Nov '14 Dec '14
Skim Milk Powder Exports Prospects
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-$1.00
-$0.80
-$0.60
-$0.40
-$0.20
$0.00
$0.20
$0.40
$0.60
-150%
-100%
-50%
0%
50%
100%
150%
U.S. Skim Milk Powder Exports Growth
US - Oceania Skim Milk Powder Price Basis
Butter Stocks/Use (in Days of Consumption)
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0 days
10 days
20 days
30 days
40 days
50 days
60 days
70 days
80 days
Jan
Feb
Mar
Ap
rM
ay Jun
Jul
Au
gSe
pO
ctN
ov
Dec Jan
Feb
Mar
Ap
rM
ay Jun
Jul
Au
gSe
pO
ctN
ov
Dec
2013 2014
Actual 2005-2014 Average
Acknowledgements
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Dairy Policy Reforms and Advanced Dairy Risk Management Strategies
VitaPlus Dairy Summit 2014
Red Wing, MN
December 10, 2014
Dr. Marin Bozic
Department of Applied
Economics
University of Minnesota-Twin
Cities
317c Ruttan Hall
1994 Buford Avenue
St Paul, MN 55108
Photo Credits:
Mara at Blue Diamond Dairy
© Sadie Frericks, 2010