Dairy Outlook and Utilizing MPP- and LGM-Dairy: Kenny Burdine University of Kentucky Agricultural Economics

Transcription

1 Dairy Outlook and Utilizing MPP- and LGM-Dairy: 2015 Kenny Burdine University of Kentucky Agricultural Economics

2 Outline for Discussion Review of Current Market Conditions Cow numbers, production expectations, dairy product prices Planning prices for 2015 Implications from 2014 Farm Bill A tale of two choices How do MPP-Dairy and LGM-Dairy margins differ?

3 MILK CONSUMPTION PER CAPITA Pounds Data Source: USDA-ERS Livestock Marketing Information Center

4 U.S. PER CAPITA CONSUMPTION OF SELECT DAIRY PRODUCTS Butter Yogurt Cheese Data Source: USDA-ERS Livestock Marketing Information Center

5 Thou. Pounds 24 MILK PRODUCTION PER MILK COW , Annual Livestock Marketing Information Center Data Source: USDA-NASS

6 Bil. $ 6.0 US DAIRY INDUSTRY EXPORT VALUES Annual Live Cattle Milk,Crm&Pwdr Whey Nat Mlk Butter Cheese Casein Data Source: USDA-FAS, Compiled & Analysis by LMIC Livestock Marketing Information Center

7 Overview of Market Spring to fall 2014 one for the books Milk prices into upper $20 s Feed prices much softer Export levels extremely high Coincides with first MPP-Dairy signup Production expansions, especially Q3 and Q4 Exports pressured by prices and stronger dollar Milk price falls by more that $5 per cwt in 4 th quarter

8 US All Milk Price (January 2009 to December 2014)

9 Mil. Head 12 JANUARY 1 DAIRY COW INVENTORY U.S., Annual = 9.3 Million Head +1.1 Percent Data Source: USDA-NASS Livestock Marketing Information Center

10 CHANGE IN MILK COWS THAT HAVE CALVED JANUARY 1, 2014 TO JANUARY 1, 2015 (1000 Head) Livestock Marketing Information Center Data Source: USDA-NASS

11 $ Per Pound 2.50 CHEDDAR CHEESE PRICES 40 Pound Block, US, Weekly JAN APR JUL OCT Avg Data Source: USDA-NASS Livestock Marketing Information Center

12 Mil. Pounds 1090 TOTAL CHEESE IN COLD STORAGE End of the Month JAN MAR MAY JUL SEP NOV Avg Data Source: USDA/NASS Livestock Marketing Information Center

13 $ Per Pound DRY WHEY PRICES US, Weekly JAN APR JUL OCT Avg Data Source: USDA-NASS Livestock Marketing Information Center

14 $ Per Pound BUTTER PRICES US, Weekly JAN APR JUL OCT Avg Data Source: USDA-NASS Livestock Marketing Information Center

15 $ Per Pound 2.30 NONFAT DRY MILK PRICES US, Weekly JAN APR JUL OCT Avg Data Source: USDA-NASS Livestock Marketing Information Center

16 Estimated Quarterly Milk Production Q1 Q2 Q3 Q4

17 Planning Prices for st quarter - $ nd quarter - $ rd quarter - $ th quarter - $19-22 (KY Mailbox) Use these as a place to start your expectations

18 US All Milk Price (January 2009 to December 2014)

19 2014 Farm Bill - Dairy MILC program repealed MILC - Payment on portion of milk when Boston Class I price is under $16.94 Ends Dairy Export Incentive Program Subsidy to encourage exports Established Dairy Product Donation Program Dairy products purchased and donated at low margin times Margin Protection Program-Dairy (MPP-Dairy) Established Effective fall 2014

20 Margin Protection for Dairy Producers (MPP-Dairy) Authorizes new margin program effective through through Dec 31, 2018 Can not participate in MPP-Dairy and LGM- Dairy Once in Dairy-MPP, in through 2018 Designed to ensure a margin milk price minus feed costs

21 What is the Relevant Margin? Offers opportunity to establish minimum actual margin level Actual Margin = Milk price minus average feed cost index Milk price US All Milk Price Average feed cost calculation is sum of: x corn price per bushel (ag prices) x SBM price per ton (Market news, IL) x alfalfa hay price per ton (ag prices)

22 Sept 2014 Actual Margin Using September prices, actual margin would look like US All Milk $25.70 $3.48 x $3.73 $ x $3.86 $197 x $2.70 Actual Margin $15.40

23 Dec 2014 Actual Margin Using December prices, actual margin would look like US All Milk $20.40 $3.78 x $4.06 $ x $3.17 $183 x $2.51 Actual Margin $10.66

24 What moves the margin the most? Factor Dec Price 10% Change Impact on Margin All Milk $20.40 $2.04 $2.04 Corn $3.78 $0.38 $0.41 SBM $ $43.17 $0.32 Alfalfa Hay $183 $18.30 $0.25

25 When is a Payment Made? Payment is made when the actual margin is below coverage level over a 2 month period The 2 month periods are couplets Jan-Feb, Mar-April, May-June, July-Aug, Sept-Oct, Nov-Dec Ie: Jan-Feb average must trigger payment Coverage can be purchased at $4-$8 margin levels in $0.50 increments

26 Coverage Level Margin Program Premiums Premium per CWT* (First 4M lbs) $4.00 None None $4.50 $0.010 $0.020 $5.00 $0.025 $0.040 $5.50 $0.040 $0.100 $6.00 $0.055 $0.155 $6.50 $0.090 $0.290 $7.00 $0.217 $0.830 $7.50 $0.300 $1.060 $8.00 $0.475 $1.360 Premium per CWT (After 4M lbs) *Premium discounted by 25% for calendar years 2014 and 2015, excluding $8 level

27 How Much Production Can be Covered? Production history highest annual milk marketings during 2011, 2012, or 2013 Provisions for adjustment by secretary based on annual milk production 2015 increased by factor of Participating dairy may cover 25% - 90% of production history in 5% increments NOTE: Both coverage level threshold and coverage percentage are annual decision Levels can be adjusted based on market conditions

28 What have these margins looked like in recent years?

29 Calculated Actual Margin (Jan 2005 to Dec 2014)

30 Calculated Actual Margin (Jan 2005 to Dec 2014)

31 Calculated Actual Margin (Jan 2005 to Dec 2014)

32 A Quick Scenario 100 cow dairy operation has production history of 2 million lbs They choose 60% coverage at $6 per cwt level This is 1.2 M lbs or 12,000 cwt They are under 4 M, so pay lower premium Premium $0.055 per cwt Annual premium $660 ($0.055 x 12,000) Total cost = $760 with $100 fee

33 Coverage Level Margin Program Premiums Premium per CWT* (First 4M lbs) $4.00 None None $4.50 $0.010 $0.020 $5.00 $0.025 $0.040 $5.50 $0.040 $0.100 $6.00 $0.055 $0.155 $6.50 $0.090 $0.290 $7.00 $0.217 $0.830 $7.50 $0.300 $1.060 $8.00 $0.475 $1.360 Premium per CWT (After 4M lbs) *Premium discounted by 25% for calendar years 2014 and 2015, excluding $8 level

34 4 months of hypothetical margins January February March April Actual Margin Couplet Margin Payment per cwt covered $7.40 $6.80 $5.80 $4.90 $7.10 $5.35 None $0.65

35 Payment Received No payment is made on Jan-Feb A $0.65 / cwt payment is made on Mar-April 2 months is 1/6 of covered production 1/6 of 12,000 cwt or 2,000 cwt Payment = 2,000 x 0.65 = $1,300 Calculation / payments continue for next 8 months

36 Online Tool Available from FSA Website: Bill/fb_MPPDTool.jsp Examine MPP-Dairy from historical perspective Examine MPP-Dairy looking forward Expectations, compare to LGM-Dairy Print enrollment forms

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42 When is Sign up? Coverage Year Registration Period 2014 / 2015 Enrollment passed 2016 July 1 Sept 30, July 1 Sept 30, July 1 Sept 30, 2017

43 How can I compare MPP-Dairy and LGM-Dairy?

44 LGM-Dairy Dairy Margin Insurance Program At end of month, lock in milk price over feed cost Milk price class III milk futures Feed price corn and soybean meal futures Available through insurance agents Premium is subsidized Effective risk management tool

45 MPP-Dairy vs. LGM-Dairy Milk price difference Feed cost factors Customization of feed factors Coverage / funding limitations Nature of the programs

46 Milk Price Differences Margins offered can t be compared directly Not apples to apples MPP-Dairy: US All Milk LGM-Dairy: Class III Milk Futures US All Milk Price will exceed class III futures Includes class I and II milk

47 Appalachian Order minus Class III

48 Appalachian Order minus US All Milk

49 Southeast Order minus Class III

50 Southeast Order minus US All Milk

51 Milk Price Differences Margins offered can t be compared directly Not apples to apples MPP-Dairy: US All Milk LGM-Dairy: Class III Milk Futures US All Milk Price will exceed class III futures Includes class I and II milk : US All Milk exceed class III by $1.65 per cwt

52 Feed Cost Factors / Customization LGM-Dairy Corn and SBM Producers match feed quantities to milk production Min s and max s exist MPP-Dairy Corn, SBM, and Alfalfa Hay ration is fixed for life of farm bill

53 Coverage / Funding Limitations MPP-Dairy cover up to 90% of production history ( ) Expansion can t be covered* LGM-Dairy all of milk can be covered LGM-Dairy has seen significant funding limitations in the past Prevented it from being more heavily utilized

54 Nature of the Programs LGM-Dairy futures based Available insurable margins evolved with market Good times = good opportunities MPP-Dairy a bit more of a throwback Countercyclical margins and premiums fixed through 2018 LGM-Dairy attractive in profitable times MPP-Dairy attractive in challenging times

55 Kenny s Last 2 I expect milk prices to moderately softer Improving through 2015 Uncertainty exists MPP-Dairy and LGM-Dairy are new safety net Margin insurance oriented Learn to use them / compare if applicable Take a long term view, but understand decision horizon is annual Take advantage of flexibility

56 Contact Information Kenny Burdine University of Kentucky Agricultural Economics (859)

57 Kenny s Last 2 Much like a bundled option through 2018 at a flat premium Current margin is only a consideration Premiums fixed through 2018 Coverage levels and percent coverage can be changed each year Be strategic about coverage levels Could be offered a guaranteed payment down the road This is a single year decision!

58 Kenny s Last 2 Distinction between Dairy-MPP and Dairy- LGM Opportunity for strategic switching? Program is becoming effective during very high margin time Like insurance, no payment is best Take a longer run perspective

59 Add Slide with 2 month margin calculation

60 More on Production Histories Based on highest marketings from Does not roll Establishment for new dairies (less than 1 year) Extrapolate from existing months Estimate based on herd size Production history is for operation, not producer Single producer can have multiple operations and production histories

61 Summary MPP-Dairy premiums and margins are fixed for the life of the bill MPP-Dairy is a 4+ year program LGM Dairy premiums and margins will evolve with Market MPP- Dairy - $100 fee offers cheap, catastrophic level protection If you only take the $4 level, insure max* Higher coverage levels are worth consideration, especially at smaller scale premium levels and as market changes Administration and signup through FSA I think this program warrants consideration

62 What is Participation Cost? $100 annual administrative fee No premium for $4 coverage level Higher coverage levels can be purchased for additional premium Premiums go up after the first 4,000,000 lbs of coverage Roughly 200 cow, 20K RHA

63 Outline for Discussion Basic nuts and bolts of the program Historical perspective of margins offered Last 5 years, implications, preliminary research MPP Dairy in Practice a quick scenario Demonstration of on-line tool Framing the decision for producers

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