Farm Bill Margin Insurance: Is It Worth It?

Transcription

1 Farm Bill Margin Insurance: Is It Worth It? Dr. Marin Bozic Elite Dairy Producers Conference Las Vegas, November 12, 2013

2 U.S Dairy IOFC Margin, / cwt Markets Red in Tooth and Claw IOFC Margins Feed Prices All-Milk Prices

3 Contracts Private Risk Markets Up To Task? All Dairy Futures & Options Open Interest

4 Many Faces of Risk Management

5 Many Faces of Risk Management Source: Dr. Mark Stephenson, University of Wisconsin-Madison

6 Prices Are Not Predictable, Risk Is

7 Two Roads Diverged in a Yellow Wood

8 Farm Bill Dairy 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, pounds of corn silage, 14.7 pounds of soybean meal 27.4 lbs of alfalfa hay

9 Farm Bill Dairy Margin $16.00 $14.00 $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $0.00

10 Farm Coverage bill Dairy Margin Level Senate House <4mil 4mil+ <4mil 4mil lbs

11 When Will Margin Insurance Pay Out? Consecutive Two-Month Periods 2012 January 7.57 Two-month Average February March 4.94 April May 3.41 June July 2.74 August September 5.51 October Calendar year is divided into six consecutive twomonth periods Average margin must be below the purchased coverage level in order for indemnities to be due.

12 No Absolute Limits On Insurable Milk Senate: Free $4.00: 80% of Milk Production Before Farm Bill (the highest of the last 3 years) $4.50-$8.00: Up to 90% of last year s production House: Up to 80% of the highest annual production over the last 3 years.

13 How Subsidized is Margin Insurance? Dairy Producer Margin Insurance Program (HR 2642) Crop Revenue Protection Coverage First 4 Mil lbs Above Coverage Subsidy $4.00 $0.000 $0.030 $4.50 $0.010 $0.045 $5.00 $0.020 $0.066 $5.50 $0.035 $0.110 $6.00 $0.045 $0.185 $6.50 $0.090 $0.290 $7.00 $0.180 $0.380 $7.50 $0.600 $0.830 $8.00 $0.950 $ % 67% 55% 64% 60% 64% 65% 59% 70% 59% 80% 48% 85% 38% N/A N/A N/A N/A

14 How Subsidized is Margin Insurance? Senate: Dairy Producer Margin Crop Revenue Free $4.00: Insurance 80% Program of (HR Milk 2642) Production Protection Before Farm Bill (the highest of the last 3 years) Coverage Coverage as % of Coverage $4.50-$8.00: Up to 90% of last year s production Avg. Margin $ % 50% House: $ % 55% Up to 80% $5.00 of the highest 61% annual production 60% over the last 3 years. $ % 65% $ % 70% $ % 80% $ % 85% $ % N/A $ % N/A

15 How Subsidized is Margin Insurance? Senate: Dairy Margin Insurance (House) Crop Revenue Free $4.00: 80% of Milk Production Before Protection Coverage Farm Premiums Bill (the Expected highest Expected of the Coverage last 3 years) (Over 4 mil $4.50-$8.00: Up to 90% of last year s production lbs) Payout Subsidy Subsidy $4.00 $0.030 $ % 50% 67% House: $4.50 $0.045 $ % 55% 64% Up $5.00 to 80% $0.066 of the highest $0.13 annual 48% production 60% over 64% the last $ years. $0.110 $ % 65% 59% $6.00 $0.185 $ % 70% 59% $6.50 $0.290 $ % 80% 48% $7.00 $0.380 $ % 85% 38% $7.50 $0.830 $ % N/A N/A $8.00 $1.060 $ % N/A N/A

16 A Game: What Would You Choose? Year Pounds shipped mil mil mil 1 43 mil 2 44 mil 3 45 mil 4 50 mil 5 55 mil Based on Newton, J.C. (2013)

17 Year 1: Information Set Based on Newton, J.C. (2013)

18 Year 1: Information Set Based on Newton, J.C. (2013)

19 Year 1: Expected Return at Enrollment Date Coverage Level Fees & Premiums Expected Indemnity Expected Net Revenue $4.00 $0.03 $0.01 -$0.01 $4.50 $0.04 $0.02 -$0.02 $5.00 $0.06 $0.04 -$0.02 $5.50 $0.10 $0.06 -$0.04 $6.00 $0.17 $0.10 -$0.07 $6.50 $0.27 $0.15 -$0.11 $7.00 $0.36 $0.23 -$0.12 $7.50 $0.80 $0.34 -$0.47 $8.00 $1.05 $0.47 -$0.58 Based on Newton, J.C. (2013)

20 Year 2: Information Set Based on Newton, J.C. (2013)

21 Year 2: Information Set Based on Newton, J.C. (2013)

22 Year 2: Expected Return at Enrollment Date Coverage Level Fees & Premiums Expected Indemnity Expected Net Revenue $4.00 $0.03 $0.21 $0.18 $4.50 $0.04 $0.35 $0.31 $5.00 $0.06 $0.54 $0.48 $5.50 $0.10 $0.78 $0.67 $6.00 $0.17 $1.04 $0.87 $6.50 $0.27 $1.33 $1.07 $7.00 $0.36 $1.65 $1.29 $7.50 $0.80 $1.98 $1.18 $8.00 $1.05 $2.33 $1.28 Based on Newton, J.C. (2013)

23 Based on Newton, J.C. (2013) How Subsidized is Margin Insurance? Coverage Premiums (Over 4 mil lbs) Dairy Margin Insurance (House) Expected Payout Expected Subsidy 2009 Expected Payout 2009 Expected Subsidy $4.00 $0.030 $ % $ % $4.50 $0.045 $ % $ % $5.00 $0.066 $ % $ % $5.50 $0.110 $ % $ % $6.00 $0.185 $ % $ % $6.50 $0.290 $ % $ % $7.00 $0.380 $ % $ % $7.50 $0.830 $ % $ % $8.00 $1.060 $ % $ %

24 In The Long Run, No One Has a Clue

25 In The Long Run, No One Has a Clue

26 In The Long Run, No One Has a Clue

27 Corn Growing Phases Apr Planting Starts May Jun Jul Aug Sep Oct Nov Germination, Vegetation Silking Starts Blistering, Milking, Dough Grain Fill Harvest Starts Killing Frost Ends Growth

28 Dairy Market Stabilization Program 7% 5% 3% 1% -1% -3% -5% -7% -9% USA Year-on-Year Milk Production Growth

29 Dairy Market Stabilization Program 7% 5% 3% 1% -1% -3% -5% -7% -9% USA Year-on-Year Milk Production Growth

30 Not Likely to Curb Long-Run Growth Based on Newton, J.C. (2013)

31 DMSP Could Reduce Policy Cost Based on Newton, J.C. (2013)

32 DMSP Could Reduce Policy Cost Based on Newton, J.C. (2013)

33 DMSP Could Accelerate Margin Recovery Average Annual Simulated Margin DSA if DSMP is Highly Effective Goodlatte- Scott How much more likely is scenario under G-S? Less than $ % 8.86% 6.1 $5.00-$ % 19.96% 1.9 $6.00-$ % 29.68% 0.8 $7.00-$ % 23.98% 0.8 Over $ % 17.52% 0.9 Based on margins forecasted with January 15, 2013 data. Elasticity of Demand: Milk Volume Participation: 75% Based on Newton, J.C. (2013)

34 What are the DMSP Penalties? If margins were $5.00-$6.00: 98 percent of stabilization base 94 percent of the marketings of milk If margins were $4.00-$ percent of stabilization base 93 percent of the marketings of milk If margins were less than $ percent of stabilization base 92 percent of the marketings of milk

35 A Simple Numerical Example 2013 Expected production: 91,618 cwt Happy IOFC margin: $8.00/cwt Happy IOFC revenue: $732,944 Basic Production History: 89,821 cwt Annual Production History: 89,821 cwt Bad memories: 2009 IOFC margin: $ IOFC margin: $5.31 Based on Newton, J.C. (2013)

36 What would $6.50 coverage level mean under different margin scenarios if we get DSA Average Annual Simulated Margin Probability DMSP Price Boost Shortfall for NON- PARTICIPATING farm* Less than $ % 88, ,509 $5.00-$ % 71, ,702 $6.00-$ % 41, ,956 $7.00-$ % 17,377-50,761 Over $ % 5,458 69,932 Based on Newton, J.C. (2013)

37 What would $6.50 coverage level mean under different margin scenarios if we get DSA Average Annual Simulated Margin Shortfall for NON- PARTICIP ATING farm Premium for $6.50 coverage Average Realized Indemnity DMSP Penalty Shortfall for PARTICIP ATING farm Less than $ ,509-13, ,669-23, ,524 $5.00-$ ,702-13,803 81,760-14, ,092 $6.00-$ ,956-13,803 39,107-7, ,460 $7.00-$ ,761-13,803 17,565-4,267-51,266 Over $ ,932-13,803 7,141-2,195 61,074 Based on Newton, J.C. (2013)

38 What would $6.50 coverage level mean under different margin scenarios if we get G-S Average Annual Simulated Margin Less than $5.00 Probability Shortfall for NON- PARTICIPATING Premium for $6.50 Indemnity Shortfall for PARTICIPAT ING farm 8.86% -329,350-14, , ,544 $5.00-$ % -222,392-14,439 75, ,650 $6.00-$ % -136,595-14,439 33, ,889 $7.00-$ % -49,389-14,439 13,083-50,744 Over $ % 71,576-14,439 5,342 62,480 Based on Newton, J.C. (2013)

39 Subsidies and Mailbox vs All-Milk price Map created by Newton, Thraen and Bozic

40 Policy Risk: Looking Inside Out vs. Looking Outside In

41 Final Thoughts Once the Farm Bill is passed and USDA issues the rules on annual enrollment processes, a new tool will be posted on dairy.wisc.edu where you will be able to enter your own production and price data and estimate if the new farm bill dairy programs would work for you. Please fill the survey now to help us estimate the participation rate. The results will be presented this afternoon just before the relocation panel.

42 Sources and References The analytical results presented here are based on a research project led by Dr. Cameron S. Thraen and John C. Newton, the Ohio State University. Primary reference: Newton, John C. Policy Options for a Modern Dairy Economy, Ph.D. Dissertation, Copyright The Ohio State University 2013.

43 Farm Bill Margin Insurance Is it Worth it? Elite Dairy Producers Conference November 12, 2013 Dr. Marin Bozic Department of Applied Economics University of Minnesota-Twin Cities 317c Ruttan Hall 1994 Buford Avenue St Paul, MN