Modifications to the Dairy Security Act (DSA) included in the Senate Farm Bill may prove less onerous and odorous to opponents of supply management in the dairy industry. Or not.
New analysis suggests that the dairy market stabilization program, aka supply management, is not triggered nearly as often with the new provisions. That’s confirmed by both the Universities of Missouri and Wisconsin.
Recall that the Wisconsin analysis of the original provisions of Foundation for the Future, the framework for DSA, suggested the supply management program would have been triggered up to 45% of the time. Missouri analysis suggested supply management might be triggered up to 20% of the time.
The new analysis cuts those estimates of supply management
triggers substantially. The reason for the reduction in the Wisconsin analysis is a change in feed formulas: “The formula for calculating feed ration costs was changed by lowering the feed parameters to 90% of the DSA levels. This seemingly small change increases the value of the margin calculation by a bit more than $1/cwt. when feed prices are at levels that have prevailed over the last four years,” says Mark Stephenson, a University of Wisconsin dairy economist.
As a result, he says, it’s harder to hit the $6 two-month trigger and $4 one-month trigger for supply management. In this new Wisconsin analysis, which is a retrospective going back to January 2006 through January 2013, supply management would have been triggered for 16 months. But two of those months would have been suspended because U.S. dairy prices would still have been higher than international prices. In the end, supply management would have been in effect about 20% of the months over the last six years.
The Missouri analysis, done by dairy economist Scott Brown
, suggests the Senate dairy bill would trigger the supply management program only 7.5% of the months from 2012 through 2022. The higher feed calculation is part of that, but much higher milk prices are also key. Brown’s analysis suggests the All-Milk price will average $19/cwt. throughout that period, which is midway between the Congressional Budget Office projection ($18.70/cwt.) and the USDA projection ($19.30).
The Missouri analysis suggests milk production will only be 0.1% lower during the period due to the supply management program, but milk prices will be a nickel higher. Exports of non-fat dry milk will fall a miniscule 4 million pounds over the period, or 0.3%.
While much of the debate has been over the dairy stabilization provision, little has been said about what the actual net return will be for dairy producers. The Senate dairy bill throws a whole new wrinkle into the equation. It offers one set of insurance rates for the first 4 million pounds of annual milk production, and another, higher set of rates for production above 4 million pounds.
The Wisconsin analysis incorporates all these rates
to estimate what the final net payout would be. For supplemental coverage, producers can choose a margin level they wish to protect and the percentage of their production they wish to protect (from 25% to 90% of annual production history). And they can do this annually.
The Wisconsin spreadsheet takes into account premiums paid, indemnities received, milk losses from milk not sold and feed savings from that milk not produced to come up with a net total per farm and per hundredweight. It also looks at four farm sizes: small, 100 cows; medium, 250 cows; large, 500 cows, and extra-large, 1,000. And it looks at supplemental insurance coverage of either 25% or 90% of annual production, and assumes producers buy supplemental insurance throughout the six-year period.
“Because the premium levels are so high, it is unlikely that farms will purchase supplemental insurance at the $7, $7.50 or $8 levels of margin protection,” says Stephenson. “The $6 to $6.50 levels of protection probably represent the ‘sweet spot’ for participating producers—the best combination of cost and benefit.”
At 25% supplemental coverage at the $6.50/cwt. level, the net total return over the six years ranged from 10¢/cwt. for small farms to 8¢/cwt. for the extra-large farms. At 90% coverage, the net total return was 30¢ for small farms to 17¢/cwt. for the extra-large farms.
The analysis also shows that margin insurance
would have provided the most relief during the depths of the 2009 crisis—February through November. At a $6.50 supplement coverage, the indemnity payment would have averaged $2.10/month (from which premiums and milk withholds must still be deducted).
“In 2012, which is shaping up to the second worst year of the young century, the magnitude of the net benefit for farmers who buy up to the $6.50 level is more subtle,” says Stephenson.
This year, the $6.50 margin would have been triggered from April through October, with an average indemnity payment of $1.41 (less premiums and milk withholds).
The Wisconsin analysis can be read here. http://dairy.wisc.edu/PubPod/Pubs/BP12-05.pdf