Dairy Margin Protection Program (MPP)

Transcription

1 Dairy Margin Protection Program (MPP) Agricultural Act of 2014 Dairy MPP Dairy Margin Protection Program A New Way to Think About a Government Safety Net A pseudo insurance program with legislated premiums Protects dairy producers from tighter milk price/feed cost margins

2 Agenda Strategies Decision Tool Dairy MPP Annual decision One data entry production history Two key farmer decisions: How much milk to protect (25% to 90%) What margin level to protect ($4 to $8)

3 Why Margins? 25 U.S Dairy IOFC Margins, / cwt IOFC Margins Feed Prices All Milk Prices Contribution to the MPP Ration 24% 27% 49% Corn Soybean Meal Alfalfa Hay

4 Historical Payment Thresholds National Margin by Two-Month Averages, Jan/Feb 2007 to Mar/Apr 2015 $18.00 $16.00 $14.00 $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $ MILC vs MPP indemnities $2.50 $4.50 $4.00 $2.00 $3.50 $3.00 $1.50 $2.50 $2.00 $1.50 $1.00 $0.50 $0.50 $0.00 $0.00 Jan-Feb May-Jun Sep-Oct Jan-Feb May-Jun Sep-Oct Jan-Feb May-Jun Sep-Oct Jan-Feb May-Jun Sep-Oct Jan-Feb May-Jun Sep-Oct MPP: $4.00/cwt Coverage Level MILCMPP: MPP $6.50/cwt Coverage Level MILC

5 MPP Decision Points 1. Should I sign up? 2. What level should I choose? 3. What percent of my production history should I cover? Risk Management How do you want to manage risk? Farms with higher debt levels should focus on risk management What is your farm s financial health? How do you operate? Do you buy all of your feed? What % of cropland is owned vs rented?

6 Risk Management Assess the likelihood and potential impact of adverse events: Single Event: High feed prices (2012) Double Event: Low milk prices & high feed prices (2009) Risk Management

7 MPP vs LGM Dairy Another tool Livestock Gross Margin Dairy (LGM Dairy) Once signed up for MPP No LGM Dairy participation MPP vs LGM Dairy MPP Key Differences Cover 25% - 90% of APH $4/cwt 8/cwt in $.50 increments Annual sign up Annual increase to APH % of milk covered is the same for all months Unlimited funding LGM Key Differences Cover 0% - 100% Determined by futures market Producer determined No limit to production growth Coverage can change with each contract Limited funding

8 Should I Sign Up for 2016? If you enrolled in 2015, You are automatically enrolled for 2016 You will receive Production History Bump Bump factor = If you haven t enrolled before, Need to make a decision for 2016 What Coverage Level? What level of coverage? $4/cwt to 8/cwt in $.50 increments May not see lower levels of coverage ($4-5 often) Premiums much higher past $6.50

9 Premium Rates $1.60 $1.40 $1.360 $1.20 $1.00 $0.80 $6.50 to $7.00 coverage has $0.54 increase in Tier 2 premium $0.830 $1.060 $0.60 $0.40 $0.20 $0.00 FREE $0.000 $0.000 $0.010 $0.020 $0.025 $0.040 $0.040 $0.100 $0.055 $0.155 $0.090 $0.290 $0.217 $0.300 $0.475 $4.00 $4.50 $5.00 $5.50 $6.00 $6.50 $7.00 $7.50 $8.00 First 4M lbs PH After 4M lbs PH Payment Frequency, % Catastrophic Coverage 37% 40% 40% 47% 50% 20% 20% 23% 23% MILC $4.00 $4.50 $5.00 $5.50 $6.00 $6.50 $7.00 $7.50 $8.00

10 60% 50% 40% 30% Payment Frequency 28% 30% 35% 40% 50% 20% 15% 15% 18% 18% 10% 0% $4.00 $4.50 $5.00 $5.50 $6.00 $6.50 $7.00 $7.50 $8.00 How much milk do I protect? Can protect anywhere from 25 90% of APH Affects size of premiums and indemnities How do I decide? What are you doing currently? Calculate your own margin (Compare to MPP)

11 Information Needed for MPP Production history for a farm Straightforward highest of Expected MPP margin Not the margin for an individual farm Hard to predict but decision tool provides an estimate Decision Tool Accuracy 7 out 8 years MPP Decision Tool Correctly Forecast Positive Net Returns to MPP Participation

12 Four Steps of the Decision Tool Secure and Free DATA SECURITY 100% Free 24/7 Access Farmer Data is Not Collected Always Available & Free to Use

13 Have to click Agree to begin

14 First Page of MPP Calculator First Page of MPP Calculator

15 First Page of MPP Calculator MPP Margin with 25% probability of being above forecast margin MPP Margin with 25% probability of being below forecast margin Predicted/Forecast Margin 2009 Forecast vs Actual

16 2009 Forecast vs Actual MPP Probability Table Two Month Margin Periods Probability Forecast Margin Will Fall Below Coverage Level Threshold, Triggering a Payment

17 MPP Probability Table Deciding on Coverage Selection MPP Target Contract Cost Premium + $100 Estimated Payments Estimated Payment Minus Contract Cost

18 Choosing Coverage Download FSA Forms Choose your coverage Strategy Why sign up? If you signed up for 2015, you are signed up for Provides insurance during times of financial distress. Three Potential Strategies Only Catastrophic ($4 90%) Risk Management ($ %) Highest Predicted Net Payment (Use MPP Software to Select)

19 Historic Highest Net Payment 4 million lbs 20 million lbs Year Level Optimal $ Level Optimal $ , , (100) 4.00 (100) (100) 4.00 (100) , , , , (100) 4.00 (100) Total 222, ,625 $0.93/cwt/yr 0.62/cwt/yr Catastrophic ($4/cwt 90%) Year 4 million lbs 20 million lbs ,123 76, (100) (100) 2011 (100) (100) ,788 49, (100) (100) 2014 (100) (100) Total 24, ,958 $0.10/cwt/yr $0.10/cwt/yr

20 Risk Management ($ %) Year 4 million lbs 20 million lbs , , (3,340) (44,300) 2011 (3,340) (44,300) , , ,930 47, (2,548) (43,420) Total 129, ,725 $0.54/cwt/yr 0.40/cwt/yr 2008: $ %

21 2009: $ % Highest Predicted Net Payment Year Picked Level Predicted Net Returns Actual Net Returns , , ,088 (11,283) ,257 (16,209) ,687 79, ,459 37, (91) (100) Total 148,81 195,492 *4 million lbs sold 0.62/cwt/yr 0.81/cwt/yr

22 Highest Predicted Net Payment Year Picked Level Predicted Net Returns Actual Net Returns , , (100) ,785 (205,545) , , ,816 47, (54) (100) Total 296, ,000 **20 million lbs sold 0.25/cwt/yr 0.34/cwt/yr Strategy Summary $1.00 $0.80 $0.60 $0.40 $0.20 $0.00 Net Returns by Strategy 4M 20M Catastrophic Risk Mgt Predicted

23 What Level Do I Need? What level of coverage do I need to cover my non-feed costs? Need to calculate your own IOFC (margin) Compare it to US MPP Margin Example: MN Dairy - FINBIN MPP vs MN Margin Avg Milk/cwt Feed/cwt Margin MPP Margin MN Adjustment *FINBIN # Farms 2,

24 MPP vs MN Margin Avg Non-feed/cwt MN Adjustment MPP level needed to cover non-feed costs *FINBIN # Farms 2, MPP vs MN Margins by Size MPP level needed to cover non-feed costs *FINBIN Avg Over

25 Limited Budget Ex. 4 Mil lbs sold, only has $10,000 to spend on MPP coverage Wants to get as much coverage as possible What level and how much covered? Limited Budget Milk Coverage Covered Cost Expected Net Return $ % 3,453 $2,728 $ % 8,186 1,533 $ % 9,415 2,726 $ % 9,933 1,682

26 Reminder Risk Management Tool It s a year by year decision Can always change coverage level in following years Links FSA Tool: UMN Extension Ag Business Mgmt: extension.umn.edu/agriculture/business Dairy Markets & Policy: NMPF Tool: