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http://amap.missouri.edu
Dairy Policy In the 2018 Farm Bill
Dr. Scott Brown
Agricultural Markets and PolicyUniversity of MissouriMarch 7, 2017
43rd Annual Southern
Dairy Conference
@MUScottBrown
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Today’s Agenda
What has happened to the MPP margin since passage? Monies available for government outlays on dairy
programs The possible distribution of outcomes for the MPP margin Some ideas to foster discussion about changes in the next
farm bill
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MPP Signup - Most Milk Has Been Signed Up At The Catastrophic Level Only
0
20
40
60
80
100
120
140
$4.00 $4.50 $5.00 $5.50 $6.00 $6.50 $7.00 $7.50 $8.00
Billio
n po
unds
2015 2016
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MPP Historical Margin
2
4
6
8
10
12
14
16
18
2008 2009 2010 2011 2012 2013 2014 2015 2016
Dol
lars
per
Cw
t
Bi-Monthly Period
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MPP Component ComparisonNov/Dec 2016 to 2007-14 Average
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
MPP Margin Milk Corn SoybeanMeal
Alfalfa
Dol
lars
per
Cw
t
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MPP Component ComparisonJul/Aug 2016 to 2015 Average
-0.6-0.5-0.4-0.3-0.2-0.10.00.10.20.30.40.5
MPP Margin Milk Corn SoybeanMeal
Alfalfa
Dol
lars
per
Cw
t
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First Things First – How Do You Construct An Adequate Safety Net With Limited Outlays?
0
20
40
60
80
100
120
140
2016 2018 2020 2022 2024 2026
Milli
on D
olla
rs
Dairy, Net CCC ExpendituresSource: Congressional Budget Office, January 2017 Baseline
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First Things First – How Do You Construct An Adequate Safety Net With Limited Outlays?
05,000
10,00015,00020,00025,00030,00035,00040,00045,00050,000
2016 2018 2020 2022 2024 2026
Milli
on D
olla
rs
Dairy, Net CCCExpenditures Dairy, Cash ReceiptsSource: Congressional Budget Office, March 2016 Baseline
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Dairy Policy Is A Balancing ActToo Strong, Excess Milk – Too Weak, Loss of Dairy Farms
-4
-2
0
2
4
6
1998 2001 2004 2007 2010 2013 2016
% C
hang
e vs
. Pre
viou
s Ye
ar
Quarterly U.S. Milk Production
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One Solution: Dairy Producers Pay A Portion Of Program Costs
Coverage Level
Tier 1Premium per cwt for
2016-2018 for covered production history at
4 mil lbs or less
Tier 2Premium per cwt, all
years for covered production history over
4 mil lbs
$4.00 None None
$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
0.015
0.015
0.015
0.035
0.127
0.063
0.175
0.020
0.060
0.055
0.135
0.540
0.230
0.300
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What Happened To MPP In 2016?
0
1
2
3
4
5
6
7
8
2012/13 2016/17
Dol
lars
per
bus
hel
Corn Price
640645650655660665670675680685
2012 2016
Dol
lars
per
pla
nted
acr
e
Corn, Total Cost of Production
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Regardless Of Policy Approach
Large outlays in bad years but they don’t happen often
No outlays in most other periods of times leaves producers paying in with nothing in return
Must be mindful of the supply response if program is “too good”
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An Example: $6.50 MPP Payments –One Bimonthly Period
0
1
2
3
4
5
6
7
8
1 256 511 766 1021 1276 1531 1786 2041 2296 2551 280620% 40% 60% 80%0%
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Accumulated Average Payment at $6.50 MPP
0
0.1
0.2
0.3
0.4
0.5
0.6
1 13 25 37 49 61
Acc
umul
ated
Ave
rage
Pay
men
t
Bi-Monthly Period
Actual 2003-13
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Accumulated Average Payment at $6.50 MPP
0
1
2
3
4
5
6
7
8
1 13 25 37 49 61
1 2 3 4 5 6 Average Historical
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What Are Some Possible Changes?
Could move to a regional program
How to account for regional differences?
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MPP Margin, Selected States and US
02468
101214161820
Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
Dol
lars
per
cw
t
CA ID KS MI MN NM NY PA TX WA WI US
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Using a $6.50 Coverage Level, Payments Assuming No Normalization of Selected State Data
0
1
2
3
4
5
6
7
Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
Dol
lars
per
cw
t
CA ID KS MI MN NM NY PA TX WA WI US
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MPP Margin, Selected States and US, Margins Normalized
02468
101214161820
Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
Dol
lars
per
cw
t
CA ID KS MI MN NM NY PA TX WA WI US
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Using a $6.50 Coverage Level, Payments Assuming Normalization of Selected State Data
0
1
2
3
4
5
6
7
Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
Dol
lars
per
cw
t
CA ID KS MI MN NM NY PA TX WA WI US
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What Are Some Possible Changes?
Move to a monthly program instead of a bimonthly program
A monthly program would pay more often than a bimonthly program
This increases program costs
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What Are Some Possible Changes?
What proportion of milk should be covered? Amount of milk covered
MILC – 0.34 or 0.45 MPP – 0.25 to 0.90 of production history LGM – All marketings up to 240,000 cwt What is the “right” level to make sure producers adjust
supplies lower in bad times?
Too lucrative means always in the money
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What Are Some Possible Changes?
Cost of producing feed versus feed prices Many dairy producers produce a portion of their feed
needs Wisconsin 60+% California <20%
Feed costs have fallen much further than the cost of growing feed Use a combination of corn total costs per acre and feed prices Might get around the regional differences that may exist if
producers can pick proportion of grown versus purchased Would have reduced payments in 2012 and increased
payments in 2016
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What Are Some Possible Changes?
Raise the trigger level or increase feed price coefficients
A $1 increase in the MPP triggers is about equivalent to returning to the original (2012) feed coefficients
About $0.25 per cwt higher payments
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Average MPP Payments at Alternative Levels
0.000.100.200.300.400.500.600.700.800.901.00
1 7 13 19 25 31 37 43 49 55 61
Dol
lars
per
cw
t
Bi-monthly Period
4
Coverage Level
4 mil lbs or less Over 4 mil lbs
$4.00 None None$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
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Average MPP Payments at Alternative Levels
0.000.100.200.300.400.500.600.700.800.901.00
1 7 13 19 25 31 37 43 49 55 61
Dol
lars
per
cw
t
Bi-monthly Period
6 6.5 4
Coverage Level
4 mil lbs or less Over 4 mil lbs
$4.00 None None$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
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Average MPP Payments at Alternative Levels
0.000.100.200.300.400.500.600.700.800.901.00
1 7 13 19 25 31 37 43 49 55 61
Dol
lars
per
cw
t
Bi-monthly Period
6 6.5 7 4 8
Coverage Level
4 mil lbs or less Over 4 mil lbs
$4.00 None None$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
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What Are Some Possible Changes?
Reduce premiums like was done for the first four million pounds in the 2015 signup
Milk price versus feed cost risk plan On farm feed inventories plays a risk reduction role Tradeoff as CBO has correlation between milk prices
and feed costs which reduces cost
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What Are Some Possible Changes?
Could move to a Risk Management Agency (RMA) program and/or a Farm Service Agency (FSA) program Premiums could adjust over time Coverage level could adjust over time More flexible signup
LGM-Dairy can give us some indication of how an RMA program could work
This program path could provide more program flexibility
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Comparison of LGM-Dairy and MPPMPP LGM - Dairy
Offered Calendar year signup occurs 15 to 60 days prior to the start of the calendar year
Last business Friday of the month, after markets close until 8pm the next day, 12 times a year
Margin US all milk price less fixed coefficients on corn, soybean meal and alfalfa prices (NASS and AMS)
CME Class III milk futures less variable coefficients on corn and soybean meal CME futures prices
Coverage period 12 months, bi-monthly calculations
10 months after one month delay where each month’s level can be adjusted
Coverage Level $4 to $8 in $0.50 increments $0.00 to $2.00 deductible in $0.10 increments
Premiums Fixed, depends on margin level
Depends on markets and deductible
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LGM Premium Subsidy Percentage
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Compare Feed Consumption and Composition – LGM versus MPP
Corn Soybean Meal
LGM Default 0.014 (tons) (0.5) 0.002 (tons)
Min 0.00364 (tons) (0.1304) 0.000805 (tons)
Max 0.0381 (tons) (1.3607) 0.013 (tons)
MPP 1.0728 0.00735
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Summary
The timing of the next farm bill passage remains unclear Will it finish by 2018? Tough process to get the 2014 farm bill completed, is this time
different? Dairy outlays are small relative to dairy cash receipts
Federal budget remains extremely tight Any program alternative to MPP will have a difficult road
Something always happens during the farm bill development process that is not predictable and drives the outcome
Think about the discussion that would have unfolded if MPP was in place during 2009 or 2012!
Dairy policy affects the path forward but usually not the final destination