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

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

Average Annual Simulated Margin DSA – if DSMP is Highly Effective Goodlatte- Scott How much more likely is scenario under G-S? Less than $ %8.86%6.1 $5.00-$ %19.96%1.9 $6.00-$ %29.68%0.8 $7.00-$ %23.98%0.8 Over $ %17.52%0.9 Based on margins forecasted with January 15, 2013 data. Elasticity of Demand: 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?

Basic Margin Protection

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% 55% 64% 60% 64% 65% 59% 70% 59% 75% 55% 80% 48% 85% 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 2013House 2013 Dairy Freedom Act $4.00$0.00 $0.03 $4.50 $0.02 $0.05 $5.00 $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 Bill What can we learn from crop insurance? prepared for MN Dairy Leaders Roundtable Monday, June 3, 2013 Arden Hills, MN Dr. Marin Bozic Department of Applied Economics University of Minnesota-Twin Cities