Dairy Reform Calculus

January 10, 2012 12:42 PM
Dairy Reform Calculus

Spreadsheet calculates on-farm costs and returns

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

Bill Lazarus, a University of Minnesota Extension economist, has developed a user-friendly tool based on the analysis of the Dairy Security Act (DSA) of 2011 done by Mark Stephenson of the University of Wisconsin and Chuck Nicholson of Cal Poly.

Bonus Content: Dairy DSA Tool

Download the spreadsheet

To recap, DSA would eliminate milk price supports and the Dairy Export Incentive Program, and replace Milk Income Loss Contract payments with a voluntary Dairy Producer Margin Protection Program. Those who participate would get free coverage of a $4 margin between milk prices and feed costs on 80% of their base milk production. Supplemental coverage could be purchased of up to an $8 margin on 90% of base milk production.

Participants would also take part in a Dairy Market Stabilization Program. When margins are low, they would not be paid for the portion of their milk that is above their individual production base.

Stephenson and Nicholson’s analysis shows that DSA would markedly reduce milk price volatility. Under current policy, they suggest, prices would range from a low of $13 per cwt. in 2015 to a high of $21 per cwt. in 2017.

With producer participation of 10% or less, volatility would be reduced to a low of $13 per cwt. in 2015 and a high of $19 per cwt. in 2017. If participation was 50%, it would be substantially reduced, with a low of $14 per cwt. in 2015 and a high of $16 per cwt. in 2017.

But that reduced volatility comes at a price. In the low-participation scenario, milk prices would average 53¢ per cwt. less, and with high participation, 92¢ per cwt. less.

The Lazarus spreadsheet builds on these assumptions, allowing users to plug in their annual milk production, annual milk sales, estimated annual production increase and level of participation in the programs.

Because DSA would lower the milk price, the spreadsheet calculates losses compared to current policy. For example, a 500-cow herd producing 24,000 lb. of milk per cow per year would lose an average of $189,000 per year with no supplemental coverage from 2012 to 2018 if there was high participation. The loss declines to $108,866 per year if supplemental insurance is purchased at the $8 margin level, and that falls to $61,106 per year if participation is low.

Stephenson and Nicholson have assumed no demand or supply shocks between 2012 and 2018. But the spreadsheet suggests a 500-cow herd would have netted $175,000 in 2009 alone because DSA protects against catastrophically low milk prices.

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.

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