1. Mark Stephenson Director of Dairy Policy Analysis University of Wisconsin, Madison Dairy Security Act as an Option For the Farm Bill

2. Use policy to fix problems that the market or an individual can’t – Standards of identity – FMMOs – Price Support Program Policy fails when it does too little or too much – Eg. Price Support Program Policy does not determine the end result— only the path that the market takes Background

3. Price Volatility – Much discussion since about 2006 Refundable Assessments (Milk Producers’ Council, 2007) Mandatory CWT (Dairy Farmers Working Together, 2007) Growth Management Plan (Milk Producer’s Council, 2009) Dairy Growth Management Initiative (DFA, 2009) Marginal Milk Pricing (Agri-Mark, 2010) Dairy Market Stabilization Program (NMPF, 2010) Farm Savings Accounts (discussed by DIAC, 2010) Margin Insurance Programs (NMPF’s DPMPP and discussed by DIAC, 2010-11) Market Cow Bonus Program (DPAC, 2011) Farm Savings Accounts (again, processor groups, 2011) Peterson Discussion Draft (July 2011; modified DMSP) Dairy Security Act of 2011 (September 2011) Federal Milk Marketing Improvement Act of 2011 (Casey, October 2011) Rural Economic Farm and Ranch Sustainability and Hunger Act of 2011 (October 2011) – Most have focused on supply correction (temporary quota, cull cow) – Some have focused on self-help (better LGM-D, FSA, etc.) Today’s Issues

4. Some Variation of the The Dairy Security Act of 2011 is the Starting Point Cost savings by repeal of MILC, DPPSP & DEIP New safety net with margin protection insurance Reduce milk price volatility with temporary reductions in milk supply Reform Federal Milk Marketing Orders

5. Points to Consider The program is voluntary. Margin Insurance and the Market Stabilization are linked—you can’t have one without the other. You would have 1 full year to make a decision to register after the bill is enacted. If you register, you will need to make a decision at that time about the level of insurance, the percent of milk covered and whether you want an option for growth. You can’t change your mind.

6. The Margin NASS All Milk Price Minus Ration Value – NASS corn, NASS alfalfa hay, AMS Soybean Meal

7. Dairy Producer Margin Protection Program $4 base margin coverage is free Partially subsidized premiums for supplemental coverage (25%–90% of base) Run by FSA Calculated as 2 month pairs Jan-Feb, Mar-Apr, etc.

8. Historic Trigger Values

9. Margin Protection Details If you register, your historic base will be highest annual production in the previous three years. – New producers can register within 180 days of first milk production. Will prorate annual production. You get margin protection on 80% of this base for free. You can elect a growth option.

10. Margin Protection Details If you want to protect more than free margin base, you can buy up in 50¢ increments You can protect from 25% to 90 % of your production base. This election is made at the time you register and continues throughout the life of the bill. Annual premiums must be paid by Jan 15 or in 2 installments. If you select growth option, the highest year determines the volume that your premiums will be based on.

11. Example Margin Protection Your historic base is 20 million pounds You select growth option and choose a $5.50 margin protection level at 75% of your production Two years later you have grown to 30 million pounds.

12. Example Margin Protection If margin is calculated as $3.50 average for two months. – Indemnity is triggered – You are paid $4.00 - $3.50 = 50¢ on your historic base = 50¢ * (200,000cwt / 6 ) * 80% = $13,333 – You receive a supplemental payment of $5.50 - $4.00 = $1.50 on your production base = $1.50 * (300,000cwt / 6) * 75% = $56,250 – Total 2 month payment = $13,333 + $56,250= $69,583

13. Example Margin Protection If margin is calculated as $4.50 average for two months. – Indemnity is triggered – No historic base payment – You receive a supplemental payment of $5.50 - $4.50 = $1.00 on your production base = $1.00 * (300,000cwt / 6) * 75% = $37,500 – Total 2 month payment = $37,500

14. Dairy Market Stabilization Program Uses same margin trigger calculation The average trigger value is based on consecutive two-month periods – E.g., Jan-Feb, Feb-Mar, Mar-Apr, etc. Different milk production base – Most recent 3-month average – Same month from previous year – Can select which base calculation each year by Jan 15

15. Dairy Market Stabilization Program Triggers if 2-month average margin is below $6 – $5—$6, no payment on milk over 2% of base to 6% of current marketings – $4—$5, no payment on milk over 3% of base to 7% of current marketings Triggers if 1-month average margin is below $4 – Under $4, no payment on milk over 4% of base to 8% of current marketings

16. Dairy Market Stabilization Program Triggers can increase – For example, if you were in a $6 trigger event and next month’s calculated 2-month average is now below $5, the more restrictive trigger is active. – It appears as though if it is a long trigger event, a rolling 3-month base can incorporate your reduced marketings. – Program is suspended when 2-month average is above $6 or U.S. price for cheddar or NFDM is more than 20% higher than world prices.

17. NASS and International Cheese Prices

18. NASS and International NFDM Prices

19. Dairy Market Stabilization Program A producer does not have to reduce milk production. – Might not want to if building base – Will not receive payment for “penalty” milk – Any penalty milk will be paid by handler to national board for purchases of dairy products for food donations or other demand enhancing activities.

20. FMMO Changes USDA must conduct a hearing process to end the use of product price formulas and use a competitive pay price to determine Class III price. All other Classes remain the same. Voting only requires a simple majority of producers or milk volume. If it is rejected, return to current orders.

21. Modeling the DSA Need many assumptions about participation Look at Baseline and 2 scenarios – High participation, 50% of producers register in each of 4 farm size categories and choose to protect 60% of their milk at a $6 margin. – Low Participation differs by farm size: 10%, 5%, 2.5% and 1% of S, M, L, XL protect 50% of milk at $5.

22. All Milk Price

23. Government Expenditures

24. NFOI for Representative Medium Farm

25. Projecting DSA & MILC Payments