December 2011 Archive for Dairy Talk

RSS By: Jim Dickrell, Dairy Today

Jim Dickrell is the editor of Dairy Today and is based in Monticello, Minn.

Would Dairy Reform Pay on Your Farm?

Dec 16, 2011

A new spreadsheet allows users to plug in their own herd sizes, production levels and expansion intentions to decide whether they’d participate in the Dairy Security Act and at what levels.

It’s fine to talk about the philosophy behind proposed dairy reforms. But the bottom-line impact to milk checks, cash flow and black (or red) ink is really what matters.

Bill Lazarus, an Extension economist with the University of Minnesota, is a master at creating spreadsheets. He put his talents to good use to develop a user-friendly tool based on the economic analysis of the Dairy Security Act (DSA) of 2011 done by Mark Stephenson with the University of Wisconsin and Chuck Nicholson with Cal Poly.

The spreadsheet allows users to pop in in their own herd sizes, production levels and expansion intentions. Then, users can plug in whether they’d participate in DSA and at what levels. The spreadsheet then instantly calculates gains and losses with each option.

As a refresher, DSA would eliminate milk price supports and the Dairy Export Incentive Program, and replace milk income loss contract (MILC) payments with a voluntary Dairy Producer Margin Protection Program.

Those who choose to participate would get free base-level coverage of a $4 margin between milk prices and feed costs on 80% of their base milk production. Producers could purchase supplemental coverage of up to an $8 margin on 90% of their base milk production.

Those choosing to participate in the Margin Protection Plan would also agree to participate in the Dairy Market Stabilization Program (DMSP). When margins are low and the DMSP is triggered, participating farms would not be paid for a small portion of their milk that is above their individual production base.

The Stephenson/Nicholson analysis shows the program will markedly reduce milk price volatility. Under current policy, the analysis suggests prices would range from a low $13/cwt. in 2015 to a high of $21 in 2017.

With low producer participation (10% or less) in the DSA program, volatility would be reduced from a low of $13 in 2015 to a high of $19 in 2017. If there was high participation (50%), volatility would be substantially reduced, with a low $14 in 2015 and a high of $16 in 2017.

But that reduced volatility comes at a price. Under the low participation scenario, milk prices would average 53¢/cwt. less. Under high participation, it would average 92¢/cwt. less.

The Lazarus spreadsheet builds on these assumptions. Because DSA would lower the milk price, the spreadsheet calculation shows losses compared to current policy. For example, a 100-cow herd producing 20,000 lb. of milk per cow would lose an average of $32,750 per year with no supplemental coverage over the seven years between 2012 and 2018 if there was high national participation in the program.

Those losses decline to $8,600 per year if supplemental insurance is purchased at the $8 margin level. Losses fall to $3,000 per year if national participation is low and supplemental insurance is purchased at the $8 margin level.

Stephenson and Nicholson assumed no demand or supply shocks to pricing between 2012 and 2018. But if you look back to 2009, Lazarus’ spreadsheet suggests our 100-cow herd would net nearly $25,000 if it had purchased $8 margin insurance on 90% of its base.

One horrific year, then, would make up for some of the losses incurred during normal-cycle years. In essence, that’s what DSA is designed to do: Reduce volatility and protect against catastrophic loss. It’s up to producers to decide if it’s worth the risk.

To analyze what the program could do on your farm, go to Lazarus’s spreadsheet here.

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Dairy Reform’s New Window of Opportunity

Dec 05, 2011

The failure of the congressional supercommittee to come to an agreement on cutting the federal budget might be a blessing in disguise for the dairy industry.

The failure of the congressional supercommittee to come to an agreement on cutting the federal budget might be a blessing in disguise.

A lot of folks argued the secretive process used by the committee is (was) no way to make law—especially law that has such wide ranging impacts as the 2012 Farm Bill. Failure to reach agreement on broad budget reforms behind closed doors now creates the opportunity to swing wide those doors, hold hearings and let the sunshine in.

While there’s widespread surface support for the Dairy Security Act of 2012, it is obvious that there’s a lot of unease with provisions of the Act. Processors, of course, are loathe to support anything that might impede supply. But dairy producer organizations in the Midwest and Northeast have also raised deeper concerns. On one end of spectrum, some say DSA doesn’t go far enough in meeting producers’ cost of production. On the other end of that rainbow, some say DSA is far too intrusive in controlling supply.

Consternation was raised exponentially after Mark Stephenson from the University of Wisconsin and Chuck Nicholson from Cal Poly released their analysis of DSA. Their economic model shows DSA can be very effective in reducing price volatility. But the cost of reducing that volatility is nearly $1/cwt. in reduced all-milk prices.

The caveat, both note, is that the model does not factor in a catastrophic collapse of demand, as occurred in 2009 when export markets shrunk 30%. Many dairy producers saw equity erode by $1,000 per cow—or more. If you spread that over a cow’s annual production of say 20,000 lb., that’s a $5/cwt. hit. In that event, $1 less in the all-milk price doesn’t seem too high a price to pay.

Or, if you don’t believe another “Black Swan” will fly into and settle onto dairy markets the rest of this decade, you might think of the $1/cwt. lower milk price as the cost of risk management. Most producers who routinely do their own risk management will spend 50¢/cwt. for marketing advice, margin calls and option premiums. If we turn risk management over to government, as DSA purports to do, $1/cwt. might be the price of that protection.

The $1/cwt. is a doubling of what it might cost the private sector to do it. But can you image the wailing that would be unleashed if there were no government involvement and 2009 recurred?

And then there’s validity itself of the Stephenson/Nicholson analysis. The Food and Agricultural Policy Institute (FAPRI) has done its own analysis and modeling of DSA for the Congressional Budget Office. But FAPRI has not publicly released those results. All that FAPRI will say is that the margins calculated by Stephenson/Nicholson seem low compared to historical norms. That could, of course, be the result of much higher feed prices going forward, or abnormally low milk prices.

In any event, holding public congressional hearings where both Stephenson/Nicholson and FAPRI present their findings would be useful. Such hearings would also allow processors and producers to challenge assumptions and air grievances.

I’m not naïve enough to believe that merely holding hearings will result in everyone coming together in the end. A round robin of “Kumbaya” will not break out. Those on either end of the policy rainbow will not be satisfied. That is a given. Yet hearings allow the opportunity for better consensus to form—and a meeting in the middle for those wishing, willing and able to compromise.

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