Managing Risk for Stability and Growth Dr. Marin Bozic MMPA/UMN-Extension Dairy Management Workshops February 5-6, 2013

A real problem…

But it hurts to leave money on the table…

Start with the end in mind. Retirement without debt? Prevent catastrophic losses? Gives me headaches, but necessary evil? Chase the highs, beat the market? Grow faster?

Three and a half strategies 1.Hedge early, hedge often. 2.LGM-Dairy 3.Farm bill Hedging for growth

Hedge early, hedge often

returns to at-the-money put options 1 month ahead: Cost: $0.19/bu Payout: $0.16/bu 3 months ahead: Cost: $0.68/bu Payout: $ months ahead: Cost: $0.95/bu Payout: $1.33/bu 9 months ahead: Cost: $1.13/bu Payout: $1.59/bu

Hedge early, hedge often

LGM-Dairy FebMar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Purchase at End of Month No Coverage Insurance Contract Period

LGM-Dairy

Farm bill Warning: Results presented here are preliminary. Further research is needed before analysis of farm level impacts is tested enough to be presented publicly for policy analysis and debate purposes. Results presented here are given exclusively for participants of MMPA/UMN- Extension Dairy Management Workshops. No permission is granted or implied for disseminating these results further without explicit permission by Dr. Bozic.

Farm bill Two alternatives:  Dairy Security Act  Goodlatte-Scott Amendment

Subsidized Margin Insurance Official name: Dairy Producer Margin Protection Program (PDMPP) Two layers: Basic Margin Protection – No-cost protection at $4.00 margin Supplemental Margin Protection – Can buy up from $4.50 to $8.00 margin in 50 cents increments (called “Coverage Level”)

Subsidized Margin Insurance

House bill - Farm with 150 cows Coverage Level Fees & Premiums Expected Indemnity DMSP Penalty Net Revenue $ ,369 5,828 -5,057 $ ,569 5,828 -4,235 $ ,390 5,828 -2,697 $5.50 1,377 13,938 5, $6.00 2,081 18,327 5,828 4,475 $6.50 2,786 23,580 5,828 11,270 $ ,479 29,770 5,828 10,729 $ ,874 37,103 5,828 16,590 $ ,229 45,862 5,828 18,412

Comparing 6-Year Net Revenue for 450 cows farm: DSA vs. Goodlatte-Scott Coverage Level Goodlatte-ScottH.R. 6083S $ ,432-26,360-29,360 $ ,23814,0339,215 $ ,17957,43954,065 $ ,92793,77684,948 $ ,325120,895124,033 $ ,807152,012127,198 $ ,00377,80514,525 $ ,217-23,200 $ ,106-25,607-84,829

Hedging for Growth Profits from hedging? Good broker that can beat the market? Mispriced Class III milk options? Subsidized LGM-Dairy insurance? Farm Bill participation? But there is another strategy too… Using risk management to grow your operation faster With solid milk marketing plan that delivers stability, your banker will be more willing to accept higher leverage

thank you

Managing Risk for Stability and Growth presented at the Dairy Management Workshops Tuesday, February 5, 2013 St. Joseph, MN Wednesday, February 6, 2013 Rochester, MN Dr. Marin Bozic Department of Applied Economics University of Minnesota-Twin Cities You may download this presentation at