The Farm CPA
Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.
Nice Dairy Margin Management Dashboard
May 01, 2014
The University of Illinois issues a daily "farmdoc" and today's release was a nice dashboard for dairy farmers to determine how much margin protection they could have received if the margin protection program had been around since 2000. The dairy farmer can plug in their elected coverage levels; the amount of protection they want (from $4 to $8); and the amount of annual production. Based on the year they select (from 2000-2013), the dashboard would indicate the amount of net income or expense from the program by each two month segment.
For example, I plugged in a dairy with a production history of 10 million pounds per year that wants $6.50 of coverage and elects to cover 75% of his production. Running the numbers for each year, we ended up with a net income or (expense) of:
As you can see, if the dairy farmer had started participating in the program in 2000, there would be nine straight years where the farmer would incur a net loss and only in 2002 and 2003 would the farmer collect any program payments. During these nine years, the dairy farmer would be out a total of $1,636,167. However, beginning in 2009, the dairy farmer collects just in one year almost all of this back ($1,434,452) and over the years 2000-2013, the dairy farmer would be $410,189 ahead by participating at these levels in the program. If he waited until 2009 to start, he would actually be ahead by $2,043,356.
This dashboard provides the dairy farmer with a good set up of historical what ifs to help them in their decision. If they expect a repeat of the high feed prices incurred between 2009 and 2013, they may want to participate at the higher levels. If, however, they feel that feed costs will remain at current levels and milk prices will remain strong, they will most likely opt for the $4 protection level since that costs nothing other than the annual $100 fee to participate in the program.
I re-calculated the numbers at the $4 level and the farmer would receive $317,049 in 2009 and $205,906 in 2012. Not a bad return for a cost of $100 per year, however, in all other years, the farmer would get nothing.
This can be a very valuable analysis tool for our dairy farmers. If you operate a dairy, make sure you run your numbers.