1. Marin Bozic North Dakota Dairy Convention Mandan, ND November 6, 2012

2. Plan for today Big changes I: What Goes Away
Big changes II: What’s Coming Up
Income over Feed Costs Margins
Margin Insurance
Stabilization Program

3. New federal dairy policy - timeline
September 2011: Rep. Peterson introduces Dairy Security Act of 2011
May 2012: Senate passes S3240 (Senate version of Farm bill)
July 2012: House Ag. Committee passes HR 6083 (House version of Farm bill)
August 2012: The country goes crazy until elections are over

4. Discontinued programs
Dairy Products Price Support Program – as of December 31, 2012
Milk Income Loss Contract (MILC) – gone as of October 1, 2012

5. No more price floors – milk powder prices will integrate with the rest of the world

6. MILC was a big help for small producers

7. From Foundation for the Future to 2012 Farm Bill

8. Income over Feed Costs Margin
All-Milk ($/cwt)
x Corn ($/bu)
x Soybean meal ($/ton)
x Alfalfa hay ($/ton)
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 lbs of alfalfa hay

9. Where does this formula come from?

10. Where does this formula come from?

11. Income over Feed Costs Margin: 2004-2012

12. Subsidized margin insurance
Official name: Dairy Producer Margin Protection Program (PDMPP)
Two layers:
Basic Margin Protection – “Free” 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”)

13. Basic Margin Protection

14. Supplemental Margin Protection: $6.50 coverage level

15. Supplemental Margin Protection: $8.00 coverage level

16. Supplemental Margin Protection: $8.00 coverage level

17. DPMPP: What triggers it exactly?
Consecutive
Two-Month Periods
2012
Two-month
Average
January
7.56
February
5.88
6.72
March
4.96
April
4.22
4.59
May
3.37
June
3.51
3.44
July
2.74
August
2.98
2.86
September
4.52
October
7.28
5.90
Calendar year is divided into consecutive two-month periods
Average margin must be below the purchased coverage level in order for indemnities to be due.

18. DPMPP: What is the payment rate?
Consecutive
Two-Month
Average
Jan – Feb
6.72
Mar-Apr
4.59
May-Jun
3.44
Jul-Aug
2.86
Sep-Oct
5.90
Basic Margin Protection
The difference between the actual margin and $4.00, except that, if the difference is more than $4.00, the Secretary shall use $4.00
Example: Jerry subscribed for basic margin protection. For Jul-Aug, payment rate was $1.14 per cwt. If Jul-Aug margin was -$0.50, payment would have been $4.00 per cwt.

19. DPMPP: What is the payment base?
Consecutive
Two-Month
Average
Jan – Feb
6.72
Mar-Apr
4.59
May-Jun
3.44
Jul-Aug
2.86
Sep-Oct
5.90
Supplemental Margin Protection:
The difference between coverage level and the greater of actual margin and $4.00.
Example: Jerry also subscribed for supplemental margin protection at $6.50 coverage level. For Jul-Aug, the payment rate on supplemental was $6.50- max($4.00, $2.86) = $2.50

20. DPMPP: What is the payment base?
Basic Production History
Used in Basic Margin Protection
Equal to the highest annual milk marketings in any 1 of the 3 calendar years immediately preceding the calendar year in which the participating dairy signed up
Annual Production History:
Used in Supplemental Margin Protection
Equal to the actual milk marketings of the participating dairy during the preceding calendar year

21. DPMPP: What is the actual payment base?
Basic Margin Protection:
Actual DPMPP base used for indemnity is the lesser of
80 percent of the basic production history, divided by 6
Actual quantity of milk marketed during the consecutive 2-month period

22. DPMPP: What is the actual payment base?
Supplemental Margin Protection:
Coverage Percentage must be chosen by producer: not less than 25 percent, nor more than 90 percent of annual production history
Actual DPMPP base used for indemnity is chosen coverage percentage times the lesser of
Annual production history divided by 6
Actual quantity of milk marketed during the consecutive 2-month period

23. DPMPP payment base - example
Jerry has a farm with 150 milking cows, with rolling herd average of 21,000 lbs. His annual milk marketings were:
2009: 3,140,146 lbs
2010: 3,142,638 lbs
2011: 3,130,758 lbs
His basic production history is 3,142,638 lbs. His annual production history is 3,130,758 lbs.

24. DPMPP payment base - example
In July-August period, milk production on his farm was 528,229lbs.
Basic Margin Protection actual base:
Min(0.8x3,142,638/6, 528,229)
= min(419,018; 528,229) = 419,018.
Supplemental Margin Protection actual base (with coverage percentage of 90 percent)
0.9 x min(3,130,758/6, 528,229)
= 0.9 x min (521,793, 528,229) = 469,613

25. DPMPP – putting it all together
Consecutive
Two-Month
Average
Jan – Feb
6.72
Mar-Apr
4.59
May-Jun
3.44
Jul-Aug
2.86
Sep-Oct
5.90
For July-August period, Jerry would get:
Basic Margin Protection: $1.14/cwt x 4,190 cwt = $4,476
Supplemental Margin Protection coverage level): $2.50 x 4,696 cwt = 11,740
Total = $16,216
Effective indemnity per cwt marketed: $3.07/cwt

26. DPMPP – how much does it cost?
Entry fee (annual):
Premiums for supplemental margin protection…

27. Supplemental Margin Protection Premiums for the first 4mil lbs
Supplemental Margin Protection Premiums (annual):

28. Supplemental Margin Protection Premiums for above 4mil lbs
Supplemental Margin Protection Premiums (annual):

29. Dairy Market Stabilization Program
Month
2012
January
7.56
February
5.88
March
4.96
April
4.22
May
3.37
June
3.51
July
2.74
August
2.98
September
4.52
October
7.28
Trigger:
Actual margins of $6.00 or less for each of the immediately preceding two months
Actual margin of $4.00 or less for the immediately preceding month

30. DMSP – What is the stabilization base?
Volume of average milk marketings for the three months immediately preceding the announcement that the stabilization program is activated OR
Volume of monthly milk marketings for the same month in the preceding year as the month in which DMSP is declared active

31. DMSP – what is the “penalty”?
Producer is not going to be paid for more than the greater of…
If margins were $5.00-$6.00:
98 percent of stabilization base
94 percent of the marketings of milk
If margins were $4.00-$5.00
97 percent of stabilization base
93 percent of the marketings of milk
If margins were less than $4.00
96 percent of stabilization base
92 percent of the marketings of milk

32. Expected returns in 2013 for 150 cow operation
Coverage Level
Fees & Premiums
Expected Indemnity
DMSP Penalty
Net Revenue
$4.00 $
$ 1,280.70
$ 2,137.65
$ (1,106.95)
$4.50 $
$ 2,078.19
$ (591.23)
$5.00 $
$ 3,231.40 $
$5.50
$ 1,377.07
$ 4,832.14
$ 1,317.41
$6.00
$ 2,081.49
$ 7,018.19
$ 2,799.05
$6.50
$ 2,785.91
$ 9,912.35
$ 4,988.78
$7.00
$ 12,478.74
$ 13,636.17
$ (980.22)
$7.50
$ 16,874.32
$ 18,299.66
$ (712.32)
$8.00
$ 26,229.03
$ 24,149.38
$ (4,217.30)

33. Expected returns in 2013 for 150 cow operation
Coverage Level
Fees & Premiums
Expected Indemnity
DMSP Penalty
Net Revenue
$4.00 $ $ $
$ (0.04)
$4.50 $
$ (0.02)
$5.00 $ $ $
$5.50 $
$6.00 $ $
$6.50 $ $
$7.00 $ $
$ (0.03)
$7.50 $ $
$8.00 $ $
$ (0.13)

34. Expected returns in 2013 for 1000 cow operation
Coverage Level
Fees & Premiums
Expected Indemnity
DMSP Penalty
Net Revenue
$4.00 $
$ ,538.01
$ 14,251.02
$ (6,213.01)
$4.50
$ ,137.68
$ 13,854.63
$ (3,534.08)
$5.00
$ ,866.44
$ 21,542.69 $
$5.50
$ 14,239.48
$ 32,214.27
$ ,723.76
$6.00
$ 26,376.05
$ 46,787.95
$ ,160.88
$6.50
$ 38,664.46
$ 66,082.32
$ 13,166.84
$7.00
$ 82,024.93
$ 90,907.81
$ (5,368.14)
$7.50
$ 111,328.82
$ 121,997.74
$ (3,582.11)
$8.00
$ 173,693.52
$ 160,995.89
$ (26,948.65)

35. Expected returns in 2013 for 1000 cow operation
Coverage Level
Fees & Premiums
Expected Indemnity
DMSP Penalty
Net Revenue
$4.00 $ $ $
$ (0.03)
$4.50 $
$ (0.02)
$5.00 $ $
$5.50 $ $
$6.00 $ $
$6.50 $ $ $
$7.00 $ $
$7.50 $ $
$8.00 $ $
$ (0.13)

36. The Bottom Line
New dairy policy will be based on subsidized margin insurance, likely complemented with market stabilization program
Premiums for DPMPP are fixed, and heavily subsidized. It makes economic sense to consider participating in these programs.

37. 2012 Farm Bill presented at the 2012 North Dakota Dairy Convention
Dr. Marin Bozic
Department of Applied Economics
University of Minnesota-Twin Cities
317c Ruttan Hall
1994 Buford Avenue
St Paul, MN 55108
You may download this presentation at