Dairy Outlook and Utilizing MPP- and LGM-Dairy: 2015 Kenny Burdine University of Kentucky Agricultural Economics
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?
MILK CONSUMPTION PER CAPITA Pounds 300 250 200 150 100 50 0 Data Source: USDA-ERS Livestock Marketing Information Center
U.S. PER CAPITA CONSUMPTION OF SELECT DAIRY PRODUCTS 22.00 20.00 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 Butter Yogurt Cheese Data Source: USDA-ERS Livestock Marketing Information Center
Thou. Pounds 24 MILK PRODUCTION PER MILK COW 1986-2014, Annual 22 20 18 16 14 12 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Livestock Marketing Information Center Data Source: USDA-NASS
Bil. $ 6.0 US DAIRY INDUSTRY EXPORT VALUES Annual 5.0 4.0 3.0 2.0 1.0 0.0 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Live Cattle Milk,Crm&Pwdr Whey Nat Mlk Butter Cheese Casein Data Source: USDA-FAS, Compiled & Analysis by LMIC Livestock Marketing Information Center
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
US All Milk Price (January 2009 to December 2014)
Mil. Head 12 JANUARY 1 DAIRY COW INVENTORY U.S., Annual 11 10 9 8 7 2015 = 9.3 Million Head +1.1 Percent 6 5 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 Data Source: USDA-NASS Livestock Marketing Information Center
CHANGE IN MILK COWS THAT HAVE CALVED JANUARY 1, 2014 TO JANUARY 1, 2015 (1000 Head) Livestock Marketing Information Center Data Source: USDA-NASS
$ Per Pound 2.50 CHEDDAR CHEESE PRICES 40 Pound Block, US, Weekly 2.30 2.10 1.90 1.70 1.50 1.30 1.10 JAN APR JUL OCT Avg. 2009-13 2014 2015 Data Source: USDA-NASS Livestock Marketing Information Center
Mil. Pounds 1090 TOTAL CHEESE IN COLD STORAGE End of the Month 1070 1050 1030 1010 990 970 950 JAN MAR MAY JUL SEP NOV Avg. 2009-13 2014 2015 Data Source: USDA/NASS Livestock Marketing Information Center
$ Per Pound 0.75 0.70 0.65 0.60 0.55 0.50 0.45 0.40 0.35 0.30 0.25 DRY WHEY PRICES US, Weekly JAN APR JUL OCT Avg. 2009-13 2014 2015 Data Source: USDA-NASS Livestock Marketing Information Center
$ Per Pound 3.20 3.00 2.80 2.60 2.40 2.20 2.00 1.80 1.60 1.40 1.20 BUTTER PRICES US, Weekly JAN APR JUL OCT Avg. 2009-13 2014 2015 Data Source: USDA-NASS Livestock Marketing Information Center
$ Per Pound 2.30 NONFAT DRY MILK PRICES US, Weekly 2.10 1.90 1.70 1.50 1.30 1.10 0.90 JAN APR JUL OCT Avg. 2009-13 2014 2015 Data Source: USDA-NASS Livestock Marketing Information Center
Estimated Quarterly Milk Production 55000 54000 53000 52000 51000 50000 2013 2014 2015 49000 48000 47000 Q1 Q2 Q3 Q4
Planning Prices for 2015 1 st quarter - $17-19 2 nd quarter - $17-20 3 rd quarter - $18-21 4 th quarter - $19-22 (KY Mailbox) Use these as a place to start your expectations
US All Milk Price (January 2009 to December 2014)
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
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
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: 1.0728 x corn price per bushel (ag prices) 0.00735 x SBM price per ton (Market news, IL) 0.0137 x alfalfa hay price per ton (ag prices)
Sept 2014 Actual Margin Using September prices, actual margin would look like US All Milk $25.70 -Corn @ $3.48 x 1.0728 -$3.73 -SBM @ $525.71 x 0.00735 -$3.86 -Alfalfa @ $197 x 0.0137 -$2.70 Actual Margin $15.40
Dec 2014 Actual Margin Using December prices, actual margin would look like US All Milk $20.40 -Corn @ $3.78 x 1.0728 -$4.06 -SBM @ $431.74 x 0.00735 -$3.17 -Alfalfa @ $183 x 0.0137 -$2.51 Actual Margin $10.66
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 $431.74 $43.17 $0.32 Alfalfa Hay $183 $18.30 $0.25
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
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
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 1.0087 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
What have these margins looked like in recent years?
Calculated Actual Margin (Jan 2005 to Dec 2014)
Calculated Actual Margin (Jan 2005 to Dec 2014)
Calculated Actual Margin (Jan 2005 to Dec 2014)
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
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
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
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
Online Tool Available from FSA Website: http://www.fsa.usda.gov/fsa/pages/content/farm Bill/fb_MPPDTool.jsp Examine MPP-Dairy from historical perspective Examine MPP-Dairy looking forward Expectations, compare to LGM-Dairy Print enrollment forms
When is Sign up? Coverage Year Registration Period 2014 / 2015 Enrollment passed 2016 July 1 Sept 30, 2015 2017 July 1 Sept 30, 2016 2018 July 1 Sept 30, 2017
How can I compare MPP-Dairy and LGM-Dairy?
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
MPP-Dairy vs. LGM-Dairy Milk price difference Feed cost factors Customization of feed factors Coverage / funding limitations Nature of the programs
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
Appalachian Order minus Class III
Appalachian Order minus US All Milk
Southeast Order minus Class III
Southeast Order minus US All Milk
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 2009 2013: US All Milk exceed class III by $1.65 per cwt
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
Coverage / Funding Limitations MPP-Dairy cover up to 90% of production history (2011-2013) 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
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
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
Contact Information Kenny Burdine University of Kentucky Agricultural Economics (859) 257-7273 kburdine@uky.edu
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!
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
Add Slide with 2 month margin calculation
More on Production Histories Based on highest marketings from 2011-2013 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
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
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
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