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.