Dairy Margin Coverage 2-1-19

We’ll be back someday. Other questions? All right. I want to talk to
you about the new– well I do want to talk to you– dairy margin coverage program. New name. It’s the same old program
under the hood, I guess, when you want to take a look
at it but a number of things have changed. This is a result
of the Farm Bill that was recently
passed by Congress and signed into law
by the president. So this Farm Bill is a whole big
package, a big suite of things. I believe 12 titles this
year under the Farm Bill. Those titles cover
different kinds of stuff. For example, title
four, I think, is the food and
nutrition programs. That’s 80% of the
cost of the Farm Bill, but there are a
whole lot of titles. Title I contains the
commodity programs, which include things
like dairy out here, and those programs
are given authority for the life of the Farm
Bill, which means five years. So these programs will actually
expire at the end of 2023. That’s kind of an unusual
feature of these programs. If Congress did nothing, they
simply expire and go away. If Congress decides to renew
them or make changes to them, then they would continue for
the life of another Farm Bill or some temporary
period of time. There are a few titles, though,
like the crop insurance, which was Title 11, that
has permanent authority. So when that was
first put into place– I think that was
back in the 1960s– it was authorized
by Congress to exist until Congress would
actually have to pass a law and say it no longer exists. That’s why they could
develop and bring something like dairy RP into
existence without a Farm Bill being passed. It already had
authority to do that. They can develop new insurance
products anytime they want to. In the last Farm Bill, we got
the Margin Protection Program, and it’s an
insurance-like product. It’s not exactly insurance,
but it behaves and acts a little like insurance did. And the reason they changed
that from the MILC Program, the Milk Income Loss
Contracts we had, was that MILC was
simply write a check and send that to
producers if we triggered a payment on the program. Direct payments, that’s called. It didn’t align very well
with their crop programs, and as we’re now back into
more trade negotiations and strategies,
having programs where you have to make decisions
about how much protection you want and need and put some
skin in that game with premiums is something that
other countries look at and they feel better
about because it doesn’t distort prices. It’s not market distorting. So that’s why we got the MPP
program last time around. Congress has a funny way of
doing all kinds of things, but one of them is
that anything that is going to expose the
budget to additional cost, the federal budget,
they will usually run a score on through the
Congressional Budget Office, which is a nonpartisan entity. And they ask them to predict
how much is this likely to cost if we did this, and they
make decisions, then, about whether they would
implement it or not. The last time
around, the program as it was designed and scored
by CBO looked to the Senate like it was going
to be too expensive. They were in kind of a budget
cutting mood back then. They’ve gotten past that. And at that point
in time, the Senate was looking for ways
to trim the costs, and so they went in there and
simply said at the 11th hour, well, let’s not only pay for
90 pounds of milk production not 100 pounds, in terms
of the cost of feed. So they did that. When they did that, it
also very much lowered the sensitivity of the program. It simply didn’t trigger when
it was supposed to trigger, and as you found out, it made
people angry because we’ve been through a whole period of time
when it felt like you should have been getting payments if
you had enrolled in the program and bought up and you didn’t. So there were also
more premiums that were paid in than there
were indemnities paid out. Last year they gave
us a temporary redo, and they completely lowered
payments in the tier one across the board and
let you re-enroll. That paid some real
money out, so this year when they started to do
the changes that was one of the things they looked at. They also completely changed
the name of the program. To simply call this Margin
Protection Program again, they felt was sort of toxic. That had been
tainted, and you guys didn’t want to hear
about a program that was named the same thing,
so they changed the name. How easy is that? Same basic concept, though. You get to choose
a level of coverage that you want and you pay
premiums based on that, and you can only cover
a certain percentage of your historic production. But beyond that, most of the
other parameters in the program were tweaked quite a bit to
make it more farm friendly. If you were enrolled in that
program last time around, MPP Program, you’ve already
got your production history. You’re not going to have
to re-establish that. You don’t even get a chance to. Even if you’ve increased
milk production quite a bit, it’s the same
production history you had in the highest of these
three years, 2011, ’12, or ’13. If you’re a new operation,
you can estimate production. There’ll be a method
for doing that, and we did have a few farms
that got caught in 2013 with starting a new facility. Maybe they had six months
worth of production was all that year, but
that was production. In 2013, that became
their production history. And Congress said, well,
that wasn’t really fair, so we’ll let you reestablish
if we fell into that. We got some bumps
along the way that were increases in
production history based on average change in
US milk production, so somewhere between
1% and 2% a year. Your production history is
going to be the highest history that you had,
including those bumps. And it’s locked in there. They’re not going to give
any more bumps to production history from here on out. So it’s not a big change,
but it’s some increase from that production history. So there’s a limited amount
of milk you can cover. Last time around,
and this time too, we have still tier one
and tier two of coverage. Tier one had been for the
first four million pounds of milk production,
and last year under that temporary
program they increased it to the
first five million pounds of production history. And they’ve kept
that in this program, so it’s still going to be
the first five million pounds of production history. They changed the percentage
you can cover, too. Last time it was 25 to 90,
and now it’s all the way down to 5% and up to 95%. This can be advantageous
for larger farms. If you’re trying to avoid having
milk in that tier two expensive category, then you can get
down to a smaller percentage and maybe keep it closer
to five million pounds. This is the list
of the premiums. This is what the premium
structure originally was under the program for tier one. It went all the way
up to 47 and 1/2 cents for $8 margin coverage. Last year when they
made the changes, they really slashed
those a lot, and it was only 14 cents
for that $8 coverage, so that was a big change. Tier two was not
changed last year at all, still pretty punitive– on $8 coverage is $1.36. This is what we’ve got now. So it’s five million pounds of
coverage, and at the $8 level, it’s only 10 cents 100 weight. And they’ve added three
new levels of coverage that you can have up to 950. This is some of the
changes that Congress made to make this
thing more sensitive. They knew if they went back to
change those feed parameters that they did originally,
that the Congressional Budget Office would score
this as costly again, and so they didn’t change those. What they did was to add
new levels of coverage that you can have
here, which should also make it more expensive, right? But they also increased the
cost of tier two coverage. In fact, this is no
longer $1.36, $1.81. So they made this a
lot more punitive. And in that way, I mean, nobody
was buying $1.36 coverage, and nobody sure is
going to buy $1.81, but Congressional Budget
office looked at that and said, oh, we’re going to
make more in premiums here, so that helps
offset the cost. It’s kind of silly,
but there you go. The games we play. So that’s what that was. This is just what
the graphs look like. This was the original fee
structure under tier one, and you notice there’s quite
a bend right here at $6.50. The reason was Congress thought
that that was the place where dairy farmers are
going to want to be, that $6.50 made a lot of sense. That was what they
called the sweet spot. And last year when they
changed it and the blue line, you’ll notice that it was
just lowered across the board and there really wasn’t that
sweet spot, except it was $8, and this year in
that brown line they lowered it all the
way across, plus they gave you these new categories. So it is much more affordable
now than it ever has been. Important. This is the tier
two, this is what it was, this is the new one. OK, so here’s a simple thing. Simple objective. Avoid tier two coverage. You don’t want to
go there, right? It’s too expensive. It doesn’t make sense. There are a couple
ways you can do that. One is if you’ve got more
than five million pounds of historic production,
play with that election of percentage out
here just to get down to close to five million pounds. For example, 10 million, you
could say 50%, 23 million maybe 20%. That strategy kind
of runs out of steam if you’ve got more than 100
million pounds of production. I think that’s roughly
like 5,000 cows, something like that. So it’s a pretty big farm. But if you’re bigger
than that, you’re going to have to
buy some tier two. This has always been true. If you elected something
like $8 coverage in tier one, you had to have the same level
of coverage, $8 in tier two, any milk that spilled
over into that. That’s why you tried to avoid
tier two, any milk in there. But now, it’s a little bit
different because I’ll show you in a second, if you elected
$8.50 coverage or above, there is no coverage available
in tier two at those levels, they didn’t provide that. So now, you get to choose
any level you want to. So the strategy is pick
something at $8.50 or above, and then you can play around
with whatever you want to in tier two. Boy, that thing just
likes proximity. I like that. So here’s what you got. If you do this like at the
$9.50 level, nothing available, you can choose anything
here including $4. That would be absolutely
no cost in tier two. However, I’m also looking at
this like at the $5 coverage level, and we’re talking
a half a cent, OK? A half a penny gives you
a $5 margin coverage. We don’t get there very often,
but we have been there before. That is really cheap– in my opinion–
catastrophic coverage, because if you start going
down to like $4 coverage, like we were down in the
less than $3 range in 2009, that would’ve paid
you dollar for dollar the difference
between that and $5. Your half a penny gets
paid back in a big hurry under those
circumstances, so I think that’s pretty cheap
catastrophic coverage. So make some
decisions about that. Could be zero. You might even want to go up
to that half a penny and $5. There’s another wrinkle they
put in this time around. You can do just like we’ve
always done with MPP, and that is every year
toward the end of the year make an election
coverage for next year. Just sign up for
one year at a time and change your ideas each year. Or you can elect one level
of coverage and protection for the entire five years. You don’t get to change
it, but if you do that, you get a 25% discount on the
premiums, further discount. So that’s a fairly
substantial rate discount, but since the
premiums themselves are already pretty low, it’s
not a huge amount of dollars out there. But still something. PARTICIPANT: Do you have to
put the dollars up front? MARK STEPHENSON: No. You don’t have to– oh, boy. Gee. Do we have anybody
from FSA in here? PARTICIPANT: [Laughter] MARK STEPHENSON: No,
the thing I would say is we don’t know
some of those things yet, because those are
implementation rules. This is what Congress
has said FSA must do, but they still have to write
a lot of rules around that. My guess is that by the
time they write those rules, it’s going to look
a lot like MPP was. Which is to say, by the end
of the federal fiscal year, the end of September, you’ll
have to pay your premiums. So if you’ve elected
coverage for a year, you’ll have to pay
it by that time. PARTICIPANT: In general,
if you choose that $5, what milk price would
that translate to? MARK STEPHENSON: Well, our feed
costs have been in the $8 to $9 dollar range, so if you take a
look at the feed costs plus $5, you’re talking about $13.50,
$14 dollar milk price. That’s the range. And we have had prices
down there before. All right, so this
is just taking a look at the historic margin over
this life of the past Farm Bill from 2014 through 2018. If we had $9.50 coverage, these
orange bars are showing you what would have been paid. Now notice that that’s
triggering payments a lot of the time, and some of the
time these are really big. I mean, this is
like $3, 100 weight that it would have
been paying in here. A lot of these are
$1 and a half or $2. So it would have
paid a lot of money. This would have been
generous under this program. Just historically, there’s no
guarantee the future is going to look like the past, but if we
go over that last historic Farm Bill, there would have been only
two months when you would have been paid at the $6
or the $6.50 level, and that wouldn’t
have been very much. It wouldn’t have covered
the cost of the premiums. But if you look at
like $9.50, 39 months. 2/3 of the time you would have
been receiving some payment, and that would have
averaged $1 100 weight on up to five million
pounds of milk over that whole time period. That’s quite a lot, and
it would have cost you $0.15, so you didn’t
get it $0.85 100 weight over this last Farm Bill
for up to the first five million tons of milk. That would have made
a difference, I think. If you took the
discount out here, that would have been
$0.89 100 weight, so the discount makes some
difference but as I said, it’s 25% savings on only
$0.15 worth of cost, so it’s not a huge
dollar amount. But let’s go back and
just take a look at this. If you look at the election
coverage out there, we have that MPP
calculator that’s forecasting a year
in advance, and I did go back and take a
look at the end of 2013, what would it have said? Well, it was predicting that
these margins were going to be up here pretty high, and that
there would have been no reason to have any coverage,
take the $4.00 coverage, which turned out to
be exactly right. No payments. It would have said, 2015
take coverage at $9.50. That’s exactly what
you should have done. Same thing in ’16. In 2017, it’s a little
bit more of a mixed bag, but it would have said,
don’t take the coverage. We expect these
prices to be higher. Jeez. Wow. I’ve got a magnetic personality. I don’t know what
the zone is here, but it’s less than three inches. 2017 there would’ve
been a couple of months with some payments
but not big ones, and in hindsight, probably
right for the year. 2018 it would have said
take the coverage, which would again have been right. So three years it would have
said sign up for it, $9.50, two years, don’t sign up. And if you looked at this is
what I was talking about here, making the choice. The five year commitment
with a discount would have given you
up to $0.89 net profit. If you took the annual
choice for those years where you wouldn’t
have paid any premium and wouldn’t have
received any indemnity, it actually wasn’t
much different at all. In fact, a little
bit less than you would have gotten with
a five year program. Reason is there were
still a few months with minus payments in 2017. And that turned out
to be good enough to kind of tip the balance. So to me, it’s
just about a wash. What would I do? So discount this as
heavily as you want to, because I’m not milking cows. I don’t have any skin in
the game, but if I was I’d sign up for the
five year coverage. Take the discount. It’s a small benefit
out there, but I just think it’s like that Ron
Popeil thing, you know. Set it, and forget it. That way you’ve got some pretty
good basic coverage in place. If you’re a smaller farm,
like 250 cows or less, this is really good basic
coverage for a farm. I mean, this margin is– you want to put it in
terms of a milk price– it’s something like
an $18 milk price that this is going
to guarantee you. Close to that. So if I’m a small farm,
I think that this is pretty decent coverage to have. If I’m a medium to
larger sized farm, it’s not going to
be adequate for all your risk management, especially
depending on how big you are. But I’d put as much into tier
one at the $9.50 level and then play around with tier two if
I wanted that catastrophic coverage. Pay the extra half penny. That’s not that big a deal. PARTICIPANT: Tier two
discount at 25% too? MARK STEPHENSON: Yup. And so I guess it’s
75% of half a cent. It’s pretty inexpensive. But a larger farm is going
to find that they’ll still want to think about additional
risk management like dairy RP or LGM or futures and options,
whatever it’s going to be. But put that on top of
a program like this. You might as well get
this in base level place. Characterizations
of the Farm Bill this year– when people were
looking at the total package, they said, it’s kind
of a yawner that there was very little in the way
of change in the Farm Bill, and that was true
for the whole thing. But when you look
at dairy as one of the few pieces that
had major changes, this was a real
change in my opinion. This was a big positive. Now, I will also say,
don’t get mad at me if you sign up for five years
and you have a couple years where you don’t
get any payments, because that’s going to
be a pretty good year. It’s worth your 15
cents away in my opinion to have the protection of that. So just a couple of
other items out here. Last year, you might remember
at the end of the year, at the end of 2017, Secretary
of Agriculture at Purdue had said that if you want
to, we will let you out of your MPP obligations. You can get away from that. And a lot of people did. And a bunch of those folks also
went in and got LGM coverage, then, because that looked
more attractive to them, which was probably a good thing. But then Congress
went back in and said, well, let’s have a redo. We’ll let you sign up again for
this Margin Protection Program, because now we’ve lowered
the premiums a lot. But the folks who signed
up for LGM Dairy– sorry. It’s incompatible. If you have that,
you can’t get this. Well, Congress said, gee,
that wasn’t very nice. So they’re actually giving
you one more redo on it. If you fell into
that time period when you couldn’t get the
MPP because of LGM coverage, you’ll be able to go
back in and re-sign up to get those payments. So that’s one thing. Mind you, when I
looked at the data, I think there are a couple
hundred farms in Wisconsin that might fall into that category. So there’s a few folks. The other thing is, if you
paid more money in premiums under MPP than you
received in indemnities over the life of
that program, then you can apply to get 75% of the
difference used toward buying coverage under this new DMC. Or if you just
decide forget that, I don’t want to
participate, you can get half of those differences
back just in cash. So they’ve made a
couple of changes here as a way of saying sorry. We didn’t get it quite right. This program is different than
all of the other programs, because it doesn’t count on
the market sentiment at all. All the rest of the
programs we have are using those futures markets
in one way, shape, or form, either directly or indirectly. And if those markets
are not thinking that prices are going
to be good next year, you might find that you
can’t get adequate coverage. In other words, the
prices being offered are not enough to cover
your costs of production. But this is a different program. This doesn’t matter, this has
no sentiment in it at all. Congress simply said, here’s
the premium structure, here are the levels
you can cover it at. It’s there and in place. But if you’re going to
use these other programs, put a marketing plan in place. Take the emotion out of it. And a marketing plan
means that you’ve got to know your
cost of production. You don’t have to know it
out to three decimal points or anything, but
be within $0.20, $0.25 of your cost of
production so that you know that you’re at least covering
cash costs of production. If you take a look at what’s
happened in the futures markets, information
does change those things. This was for
December milk prices, which would have closed in
January on January 5 or so. And you’ll notice that back here
in the early part of October, they were well above $16. And over that time
period, they wandered down to where they had lost
almost $3 worth of values. And we’re feeling
that right now. But if you had a
marketing plan in place that maybe said, I know
what my costs of production are, and maybe you have
as part of that plan if I can protect
$16 I should put a floor under 20% of my milk
production or something, start to layer it
like that, you would have had part of this covered. So that’s the kind of
thing that a marketing plan will do for you. With that, I’d take questions
either about this program or the other one. I think they work
nicely together. They’re not
incompatible anymore. PARTICIPANT: Do you know when
they’re going to have sign up? MARK STEPHENSON: No,
I don’t know when they’re going to have sign up. FSA still has to write
those implementation rules. My guess is they’re
working hard on it now, but it still may take a
couple months before they get the rules written. They’ll have to go
through a national level training for the program. It might be a couple months
before sign up begins, and then I don’t know how
long sign up would be. I’m going to guess
a couple months. So it’s going to probably be
a lot like it was last year that you’ll get to
look back and make a choice on things
where we already know some of the payout data. And by the way, that’s MPP
forecast thing is not looking for any months that are going to
hit $9.50 in 2019 at this point in time. They get close to
it, but not there. However in all fairness,
this is the futures markets that are changing on that. That’s the underlying
information. I’m doing the same kind of thing
that Risk Management Agency does with LGM Dairy or Dairy RP. But I host the tool for USDA. PARTICIPANT: But
MPP forecast would be the same as the
DMC forecast, it would be the same
as DMC or whatever. MARK STEPHENSON: Yeah, that
will be the same thing, except that we’ll change
it for the new parameters and any implementation rules
that might be different. PARTICIPANT: A larger farm
could use the margin coverage plan for the first
5 million pounds and then use the RP program
for what’s over that? MARK STEPHENSON: Exactly. PARTICIPANT: But you can’t
insure the same policy twice. MARK STEPHENSON: No, you can. PARTICIPANT: Oh, you can? MARK STEPHENSON: You
can double down on it. PARTICIPANT: [INAUDIBLE] MARK STEPHENSON: Yeah. If you’re a small
farm, for example, and you produce less
than five million pounds, you can do your full
five million pounds under this program, and
you can do 95% of that again under Dairy RP. PARTICIPANT: So
when you do this , if a farm would do that and
did both programs, cost wise, how does that come out to
just flat out buying options? MARK STEPHENSON: Well, PARTICIPANT: Originally that
was five million pounds. What’s the cost of
five million pounds– MARK STEPHENSON: OK, so– PARTICIPANT: Do you have
scenarios like this? MARK STEPHENSON: No, but
I could do some of this off the top of my head. I’m willing to on that. If you’re looking at
this program as I said, it’s kind of like
thinking about putting a floor under an $18 milk price
for the DMC program, Dairy Margin Coverage Program. And for the first five
million, that costs you $0.15. OK, and it’s hard to get a
put that’s going to be a $0.15 expenditure that would put a
floor under that $18.00 price. You don’t find that very often. OK, so that part’s there. Now you’re talking
about, OK what is it going to cost me to put a
floor under some kind of price under DMP? Or dairy revenue protection. And that depends a little
bit on all the options and where the
market sentiment is. But generally in that $0.15
to $0.20, $0.30 range, further out, you can
find those floors. So now you’re asking, OK, could
I do that for less with puts? I’m going to say no,
because if you’re going to do it with
puts, you’re going to have to buy double puts. You’re going to have to protect
for twice the amount of milk production to get the same
protection that you’re talking about here. PARTICIPANT: I was just
saying, if you just did five million puts
and then do the two programs for the cost
of what they got, what’s the comparison
between the two? Saying you know, it’s just a
simple is obviously a higher price, but you’re
talking a lower volume, but you’re only producing
five million pounds. But I’m just saying, if it’s
that affordable using two, if it’s cheaper than going
with the simple options, to me it’s a no brainer. MARK STEPHENSON:
Well, what I’m telling you is you’re kind of
comparing apples and oranges, because you’re talking
about essentially doing two puts for milk production–
you’re talking about protecting your milk production twice. And so if you’re going
to make it comparable, you’ve got to look
at the cost of buying two puts instead of one. PARTICIPANT: Oh, I
realize that, but I’m just saying there is a definite
cost so why wouldn’t you go with the two– MARK STEPHENSON:
I’m not suggesting that what you’re
saying is wrong. DMC is cheap, cheap, cheap right
now if you look at this thing. To put an $18 floor under
your milk price for $0.15– I think that’s cheap. You’d have a hard time finding
that put anywhere at anytime. Occasionally you will. PARTICIPANT: The market’s got
to be way up if you’re going to get a put at that cheap. MARK STEPHENSON: It does. Exactly. PARTICIPANT: That may happen. MARK STEPHENSON: It may happen,
but I’m just telling you– who’s going to care
about the two cents to kind of guarantee it right? I wouldn’t. But the Dairy RP
Program is going to put a floor under there again
at a relatively inexpensive price. Right now it’d be expensive. In fact, you couldn’t find
that $18 price out there now with Dairy RP. It’s not going to exist. They aren’t guaranteeing
that kind of thing yet, so you can’t achieve it. You could perhaps find
somebody willing to sell you a put for an $18
price, but that’s going to be dollars
per hundredweight. Other questions or comments? If not, thanks. We’ve been here a while. It’s a marathon. PARTICIPANT: Well, let;s thank
Mark, please, for coming. [APPLAUSE] Just a couple of wrap-up notes– we have a lot of
food left over, so feel free to keep
eating or grab some if you want for your way home. I’m sure there’s [INAUDIBLE]
whatever we have here, so please grab some extra
food, refreshments in the back. There are some handouts
if you didn’t get them along the back wall there,
so feel free to do that. Again, thank you all for coming. If you have any
questions, I don’t know, Mark do you plan to stick
around for a few minutes, or?

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