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Dairy Policy In the 2018 Farm Bill

Dr. Scott Brown

Agricultural Markets and PolicyUniversity of MissouriMarch 7, 2017

brownsc@missouri.edu

43rd Annual Southern

Dairy Conference

@MUScottBrown

Today’s Agenda

What has happened to the MPP margin since passage? Monies available for government outlays on dairy

programs The possible distribution of outcomes for the MPP margin Some ideas to foster discussion about changes in the next

farm bill

MPP Signup - Most Milk Has Been Signed Up At The Catastrophic Level Only

0

20

40

60

80

100

120

140

$4.00 $4.50 $5.00 $5.50 $6.00 $6.50 $7.00 $7.50 $8.00

Billio

n po

unds

2015 2016

MPP Historical Margin

2

4

6

8

10

12

14

16

18

2008 2009 2010 2011 2012 2013 2014 2015 2016

Dol

lars

per

Cw

t

Bi-Monthly Period

MPP Component ComparisonNov/Dec 2016 to 2007-14 Average

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

MPP Margin Milk Corn SoybeanMeal

Alfalfa

Dol

lars

per

Cw

t

MPP Component ComparisonJul/Aug 2016 to 2015 Average

-0.6-0.5-0.4-0.3-0.2-0.10.00.10.20.30.40.5

MPP Margin Milk Corn SoybeanMeal

Alfalfa

Dol

lars

per

Cw

t

First Things First – How Do You Construct An Adequate Safety Net With Limited Outlays?

0

20

40

60

80

100

120

140

2016 2018 2020 2022 2024 2026

Milli

on D

olla

rs

Dairy, Net CCC ExpendituresSource: Congressional Budget Office, January 2017 Baseline

First Things First – How Do You Construct An Adequate Safety Net With Limited Outlays?

05,000

10,00015,00020,00025,00030,00035,00040,00045,00050,000

2016 2018 2020 2022 2024 2026

Milli

on D

olla

rs

Dairy, Net CCCExpenditures Dairy, Cash ReceiptsSource: Congressional Budget Office, March 2016 Baseline

Dairy Policy Is A Balancing ActToo Strong, Excess Milk – Too Weak, Loss of Dairy Farms

-4

-2

0

2

4

6

1998 2001 2004 2007 2010 2013 2016

% C

hang

e vs

. Pre

viou

s Ye

ar

Quarterly U.S. Milk Production

One Solution: Dairy Producers Pay A Portion Of Program Costs

Coverage Level

Tier 1Premium per cwt for

2016-2018 for covered production history at

4 mil lbs or less

Tier 2Premium per cwt, all

years for covered production history over

4 mil 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

0.015

0.015

0.015

0.035

0.127

0.063

0.175

0.020

0.060

0.055

0.135

0.540

0.230

0.300

What Happened To MPP In 2016?

0

1

2

3

4

5

6

7

8

2012/13 2016/17

Dol

lars

per

bus

hel

Corn Price

640645650655660665670675680685

2012 2016

Dol

lars

per

pla

nted

acr

e

Corn, Total Cost of Production

Regardless Of Policy Approach

Large outlays in bad years but they don’t happen often

No outlays in most other periods of times leaves producers paying in with nothing in return

Must be mindful of the supply response if program is “too good”

An Example: $6.50 MPP Payments –One Bimonthly Period

0

1

2

3

4

5

6

7

8

1 256 511 766 1021 1276 1531 1786 2041 2296 2551 280620% 40% 60% 80%0%

Accumulated Average Payment at $6.50 MPP

0

0.1

0.2

0.3

0.4

0.5

0.6

1 13 25 37 49 61

Acc

umul

ated

Ave

rage

Pay

men

t

Bi-Monthly Period

Actual 2003-13

Accumulated Average Payment at $6.50 MPP

0

1

2

3

4

5

6

7

8

1 13 25 37 49 61

1 2 3 4 5 6 Average Historical

What Are Some Possible Changes?

Could move to a regional program

How to account for regional differences?

MPP Margin, Selected States and US

02468

101214161820

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Dol

lars

per

cw

t

CA ID KS MI MN NM NY PA TX WA WI US

Using a $6.50 Coverage Level, Payments Assuming No Normalization of Selected State Data

0

1

2

3

4

5

6

7

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Dol

lars

per

cw

t

CA ID KS MI MN NM NY PA TX WA WI US

MPP Margin, Selected States and US, Margins Normalized

02468

101214161820

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Dol

lars

per

cw

t

CA ID KS MI MN NM NY PA TX WA WI US

Using a $6.50 Coverage Level, Payments Assuming Normalization of Selected State Data

0

1

2

3

4

5

6

7

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Dol

lars

per

cw

t

CA ID KS MI MN NM NY PA TX WA WI US

What Are Some Possible Changes?

Move to a monthly program instead of a bimonthly program

A monthly program would pay more often than a bimonthly program

This increases program costs

What Are Some Possible Changes?

What proportion of milk should be covered? Amount of milk covered

MILC – 0.34 or 0.45 MPP – 0.25 to 0.90 of production history LGM – All marketings up to 240,000 cwt What is the “right” level to make sure producers adjust

supplies lower in bad times?

Too lucrative means always in the money

What Are Some Possible Changes?

Cost of producing feed versus feed prices Many dairy producers produce a portion of their feed

needs Wisconsin 60+% California <20%

Feed costs have fallen much further than the cost of growing feed Use a combination of corn total costs per acre and feed prices Might get around the regional differences that may exist if

producers can pick proportion of grown versus purchased Would have reduced payments in 2012 and increased

payments in 2016

What Are Some Possible Changes?

Raise the trigger level or increase feed price coefficients

A $1 increase in the MPP triggers is about equivalent to returning to the original (2012) feed coefficients

About $0.25 per cwt higher payments

Average MPP Payments at Alternative Levels

0.000.100.200.300.400.500.600.700.800.901.00

1 7 13 19 25 31 37 43 49 55 61

Dol

lars

per

cw

t

Bi-monthly Period

4

Coverage Level

4 mil lbs or less Over 4 mil 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

Average MPP Payments at Alternative Levels

0.000.100.200.300.400.500.600.700.800.901.00

1 7 13 19 25 31 37 43 49 55 61

Dol

lars

per

cw

t

Bi-monthly Period

6 6.5 4

Coverage Level

4 mil lbs or less Over 4 mil 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

Average MPP Payments at Alternative Levels

0.000.100.200.300.400.500.600.700.800.901.00

1 7 13 19 25 31 37 43 49 55 61

Dol

lars

per

cw

t

Bi-monthly Period

6 6.5 7 4 8

Coverage Level

4 mil lbs or less Over 4 mil 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

What Are Some Possible Changes?

Reduce premiums like was done for the first four million pounds in the 2015 signup

Milk price versus feed cost risk plan On farm feed inventories plays a risk reduction role Tradeoff as CBO has correlation between milk prices

and feed costs which reduces cost

What Are Some Possible Changes?

Could move to a Risk Management Agency (RMA) program and/or a Farm Service Agency (FSA) program Premiums could adjust over time Coverage level could adjust over time More flexible signup

LGM-Dairy can give us some indication of how an RMA program could work

This program path could provide more program flexibility

Comparison of LGM-Dairy and MPPMPP LGM - Dairy

Offered Calendar year signup occurs 15 to 60 days prior to the start of the calendar year

Last business Friday of the month, after markets close until 8pm the next day, 12 times a year

Margin US all milk price less fixed coefficients on corn, soybean meal and alfalfa prices (NASS and AMS)

CME Class III milk futures less variable coefficients on corn and soybean meal CME futures prices

Coverage period 12 months, bi-monthly calculations

10 months after one month delay where each month’s level can be adjusted

Coverage Level $4 to $8 in $0.50 increments $0.00 to $2.00 deductible in $0.10 increments

Premiums Fixed, depends on margin level

Depends on markets and deductible

LGM Premium Subsidy Percentage

Compare Feed Consumption and Composition – LGM versus MPP

Corn Soybean Meal

LGM Default 0.014 (tons) (0.5) 0.002 (tons)

Min 0.00364 (tons) (0.1304) 0.000805 (tons)

Max 0.0381 (tons) (1.3607) 0.013 (tons)

MPP 1.0728 0.00735

Summary

The timing of the next farm bill passage remains unclear Will it finish by 2018? Tough process to get the 2014 farm bill completed, is this time

different? Dairy outlays are small relative to dairy cash receipts

Federal budget remains extremely tight Any program alternative to MPP will have a difficult road

Something always happens during the farm bill development process that is not predictable and drives the outcome

Think about the discussion that would have unfolded if MPP was in place during 2009 or 2012!

Dairy policy affects the path forward but usually not the final destination