DAIRY SECURITY ACT OF 2011

Transcription

1 DAIRY SECURITY ACT OF Southern Dairy Conference Atlanta, GA January 24, 2012 Scott Brown

2 ECONOMIC ANALYSIS OF DSA 2011 There are many challenges in quantifying the effects of the program Producer behavior to the program when there is little history available to gauge participation A way to include the margin volatility that the industry would face The distribution of margin outcomes critical to any analysis of the program

3 DSA2011 MARGIN Dollars per Cwt

4 CORRELATION OF FEED COSTS AND MILK PRICES CRITICAL! There has been quantitative analysis of DSA2011 but most have implied little correlation between feed costs and milk prices Monthly historical feed and milk correlation My analysis 0.45 The higher the correlation, reduces program operation and cost

5 WHAT HAS CHANGED IN DSA2011? Voluntary Program If you want margin insurance, automatically enrolled in the Dairy Market Stabilization Program Administrative fee $100, $400, $1,000 Margin Insurance Base Program Maximum Payment $4, 80% of historical base covered Supplemental Program Options: base growth and coverage level Margin uses different corn and soymeal prices NASS Ag Prices Corn AMS Market News Soybean Meal More changes likely

6 2012 FARM EXAMPLE MARGIN INSURANCE Historical Marketings 1,000,000 pounds Historical Base Program Marketings 800,000 1,000,000 pounds pounds This farm has two choices regarding supplemental coverage: 1) Level of coverage 0%, 25% to 90% 2) Allow for growth in marketings Supplemental Historical Marketings Program 0 to 1,000, ,000 pounds

7 2013 FARM EXAMPLE MARGIN INSURANCE Historical Marketings 1,000,000 pounds 2012 Marketings 1,500,000 pounds Historical Base Program Marketings 2012 Example 800,000 1,000,000 pounds pounds Base Program 2012 Marketings 800,0001,500,000 pounds pounds Supplemental Historical Marketings Program 0 to 1,000, ,000 pounds Supplemental 2012 Marketings Program 0 to 1,500,000 1,350,000 pounds

8 PAYMENTS RECEIVED 1,000,000 pounds of base and 2012 marketings of 1,500,000 pounds Margin No SP 90% SP - $6.5 90% SP - Base No SP 90% SP - $6.5 90% SP - Base Growth - $6.5 Growth - $6.5 -$1.00 $ 32,000 $ 52,430 $ 52,430 $ 32,000 $ 52,430 $ 62,645 $0.00 $ 32,000 $ 52,430 $ 52,430 $ 32,000 $ 52,430 $ 62,645 $2.00 $ 16,000 $ 36,430 $ 36,430 $ 16,000 $ 36,430 $ 46,645 $4.00 $ - $ 20,430 $ 20,430 $ - $ 20,430 $ 30,645 $7.00 $ - $ (2,070) $ (2,070) $ - $ (2,070) $ (3,105) Less administrative fee

9 PARTICIPATION CHOICE Depends on the level of risk an operation can handle If a small signup occurs, DMSP less effective If a large signup occurs, DMSP more effective CBO shows 60% participation All along I have said, supplemental is the interesting piece of this package

10 DIFFERENT BASES FOR THE PROGRAM Margin Insurance (DPMPP) 80% of historical production for base program Supplemental program allows for growth Allows for new entrants Supply Management (DMSP) Previous three months or year ago level More adjustment to supply management base than the margin insurance base program

11 HOW DOES THE DAIRY MARKET STABILIZATION PROGRAM WORK? $6 for 2 consecutive months Producers paid for 98% of their base milk marketings Maximum reduction is 6% of current milk marketings $5 for 2 consecutive months Producers paid for 97% of their base milk marketings Maximum reduction is 7% of current milk marketings $4 for 1 month Producers paid for 96% of their base milk marketings Maximum reduction is 8% of current milk marketings World price triggers to suspend the program

12 DMSP ONLY ANALYSIS Let s Look How The Program Would Have Operated in 2009 Let s take CBO s assumption that 60% participate in margin protection This portion of the analysis did not incorporate the world price triggers

13 KEY ASSUMPTIONS PRODUCER RESPONSE TO DMSP Assume they choose to deliver only 20% of the milk over the eligible quantity Why market that milk if the price is zero? Build Base Disposal Cost exceeds Hauling Cost New base determination incorporated Assume most producers choose year ago production for the base

14 MONIES COLLECTED UNDER DMSP Assume any money collected under DMSP in period t is spent on cheese purchases equally in periods t+1, t+2 and t+3 10 % of cheese purchases displace commercial consumption

15 PERCENT OF MILK PRODUCTION AFFECTED BY DMSP 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Mar-09 May-09 Jul-09 Sep-09 Nov-09 US VT WI

16 MARGIN COMPARISON WITH DMSP OPERATION DMSP Trigger Level $4 trigger $4-$5 trigger $5-$6 trigger 12.0 DMSP Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Base DMSP

17 2009 U.S. ALL MILK PRICE FROM DMSP OPERATION Dollars per Cwt Jan Apr Jul Oct Baseline DMSP

18 SUMMARY OF DMSP It will lower the cost of DPMPP Producers will be limited in milk deliveries they will be paid for Producers do not pay under DMSP Tough to gauge producer behavior

19 MARGIN INSURANCE Remember Margin Insurance is the combination of the Base Program and the Supplemental Program Likelihood of Base Program payments small Supplemental Program Premium versus the expected payment the key

20 PROBABILITY OF BASE PROGRAM PAYMENT, % 1.8% 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% X=4 3<X<4 2<X<3 1<X<2

21 PROBABILITY OF BASE PROGRAM PAYMENT, % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 0.07% 0.13% 0.73% 1.83% 2.70% 94.53% X=4 3<X<4 2<X<3 1<X<2 0<X<1 X=0

22 PROBABILITY OF SUPPLEMENTAL PROGRAM PAYMENT WITH $6.5 COVERAGE, % 80% 78.00% 70% 60% 50% 40% 30% 20% 10% 0% 9.00% 5.53% 5.43% 2.03% X=2.5 2<X<2.5 1<X<2 0<X<1 X=0

23 SUPPLEMENTAL MARGIN COVERAGE, WHAT WOULD YOU DO? Coverage Level Premium per Cwt. $4.50 $0.015 $5.00 $0.036 $5.50 $0.081 $6.00 $0.155 $6.50 $0.230 $7.00 $0.434 $7.50 $0.590 $8.00 $0.922

24 ANNUAL EXPECTED QUARTERLY MARGIN PAYMENTS Average $6.5 SP outcome $0.31, Premium $0.23 Average BP outcome $ Dollars per Cwt % 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% $6.5 SP BP

25 EFFECTS OF DSA US ALL MILK PRICE Dollars per cwt Baseline Scenario Change (Right Axis) -0.05

26 LET S THINK ABOUT THESE MARGIN DISTRIBUTIONS AGAIN Where does this program operate? Why does correlation matter?

27 DSA2011 MARGIN Dollars per Cwt

28 DISTRIBUTION OF MARGIN OUTCOMES $ per cwt Draw Market

29 WHAT DOES THE MILC PROGRAM DO? $ per cwt Draw Market MILC

30 WHAT COVERAGE DOES THE BASE PROGRAM PROVIDE? $ per cwt Draw Market BP MILC

31 AND ADDING SUPPLEMENTAL COVERAGE TO THE MIX? $ per cwt Draw Market BP SP-T7 MILC

32 SUMMARY Producer response to this program remains difficult to determine Appears there may be incentive to participate Individual response relative to other producers What do you think the future holds for this industry from an average margin standpoint? CBO scores DSA2011 as a savings to the federal government

33 QUESTIONS