Brian W. Gould and John Newton discuss new dairy programs and the role of LGM-Dairy in the new policy environment.
Number of the week: 6
In order to avoid the “dairy cliff”, the 2002 Farm Bill was extended 6 times in spring 2008, before the 2008 Farm bill was finally passed. This year, the 2008 Farm bill has expired, the new Farm Bill has not been passed, yet there is no agreement to extend the 2008 Farm Bill into 2014.
“So this is Christmas. And what have we done? Another year over. And a new one just begun.”
As John Lennon asks, what have we done this year? Well, one thing we did not get done is a new Farm Bill. As I am writing this, the four leaders of the Farm Bill Conference Committee seem to be converging on compromise bill language that they hope will be acceptable to a majority in both the Senate and the House of Representatives. One of the few issues still left unresolved is the design of the new dairy policy. For the last two years, the debate has been framed as a binary choice between two proposals best known under nicknames, the Dairy Security Act and the Goodlatte-Scott Amendment. Are these two proposals really the only two possible outcomes? Let us remind ourselves how the Milk Income Loss Contract was born. This policy instrument, a foundation of U.S. dairy safety net over the past decade, was not contrived by any stakeholder group, and it did not go through public debate. Instead, it was contrived by the leaders of the 2002 Farm Bill Conference Committee. As a poet once said, “what’s past is prologue”, and as the 2014 Farm Bill Conference Committee negotiates the new dairy policy, we should at least consider the possibility that the final outcome could be neither DSA nor Goodlatte-Scott, but something completely different.
The delay in completing the new Farm Bill negotiations means that the final votes will not happen until the first few weeks of January. For a brief period of time, U.S. dairy policy will be based on an antiquated law passed more than 64 years ago. Legally speaking, the Agricultural Act of 1949 requires the Secretary of Agriculture to implement measures that would result in milk checks nearly doubling, with per hundredweight milk price just under $40. So should we fear higher prices for dairy foods? Should we fear $8-a-gallon milk, or as the mainstream media likes to call it, the “dairy cliff”?
We can rephrase that question to the following – do we need another short term Farm bill extension, to avoid the ‘dairy cliff’? The House of Representatives passed a bill last week that would extend the 2008 Farm bill for one month, to allow enough time for the Conference Committee to complete its work. The Senate did not agree to extend the bill. Why might the Senate not wish to do such a simple and non-controversial action? In order to understand their motivation, you need to recall what happened in Spring 2008, when 2008 Farm bill was being finalized. As the figure above illustrates, 2002 Farm bill was first extended for 3 months. Then, when all deadlines were again broken, another one-month extension was passed. Four more extensions were enacted, each one only one or two weeks in duration. Short-term extensions are simply not credible, and once that path is chosen, there is nothing to stop yet another and another short-term extension.
The odds of January retail milk prices reflecting the 1949-based support prices are about as high as having your gallon of milk turn into pumpkin at the stroke of midnight on December 31. Sec. Vilsack made it clear that the ‘dairy cliff’, will not happen, as long as a new Farm Bill is agreed to quickly. By refusing to go along with the House plan, the Senate is signaling – the fear from ‘dairy cliff’ is not grounded in reality, and it is time to close the book on the 2014 Farm bill.
This week’s Minnesota in Numbers was produced with financial support from Dairy Star and Minnesota Milk Producers Association.
Number of the Week: 2
University of Minnesota undergraduate team placed second at the National Collegiate Dairy Products Evaluation Contest in Cheddar Cheese.
From left to right front row: Alyssa Pagel, Ashley Adamski, Molly Erickson and David Potts.
Back row: Dr. Tonya Schoenfuss, Megan Parker, Claire Burrington, Jill Tomczak, Liz Reid and Kenny Smith
The Collegiate Dairy Products Evaluation Contest was started in 1916 as the Student Butter Judging Contest. Today, in addition to butter, 3 member student teams, and individual graduate students, judge milk, cottage cheese, Cheddar cheese, vanilla ice cream, and strawberry yogurt. The goal is to score the products as similar to the evaluation of the industry expert judges. The students get an appreciation for sensory evaluation and the key quality aspects of dairy products through this experience, making them valuable future employees for dairy product manufacturers.
After a 15 year hiatus from competition, the University of Minnesota dairy products judging team was formed again in 2012 under the leadership of Dr. Tonya Schoenfuss of the Department of Food Science and Nutrition. While the team is still in a building phase, they are already achieving notable results. At the Midwest regional contest the team won first place in both the ice cream and yogurt categories beating the competition from Wisconsin, Iowa and South Dakota. Eleven teams competed at the national contest held last month at the International Dairy Show in Chicago. Alyssa Pagel and Jill Tomczak, both Food Science undergrads, finished 3rd and 4th in Cheddar, respectively and the undergraduate team was 2nd in Cheddar Cheese. Go Gophers!
This week’s Minnesota in Numbers was produced with financial support from Dairy Star and Minnesota Milk Producers Association.
Number of the Week: 1600
USDA estimates Minnesota October 2013 milk yield per cow at 1600lbs.
Minnesota milk yields per cow have been steadily increasing over time, growing on average 1.98% per year since the World War II. Perhaps a more interesting way to examine yields is to plot them against a measure of farm profitability, rather than time. In the scatterplot above, on the horizontal axis we measure the difference between Minnesota year-on-year growth in milk yields and the national yield growth. On vertical axis is the dairy Income-over-feed-costs (IOFC) margin, as will be defined in the new Farm bill. There is a noticeable inverted relationship between these two measures over the last seven years.
For example, in August 2012, national IOFC margin was $2.98, which is more than $5.00 below the historical average. The U.S. average milk yield per cow that month was 1,785 lbs, 5 lbs less than in August 2011. In contrast, Minnesota yield in August 2012 was 1,620, which is 50 lbs higher than in August 2011. Minnesota yield growth that month was 3.46% higher than the national yield change. In contrast, in January 2008, IOFC margin was $11.96, almost $4.00 over the historical average. National yield in January 2008 was at 1,723 or 17lbs over January 2007. In Minnesota, January 2008 yield was 1,610, or 15 lbs less than in January 2007. Since 2007, the correlation between IOFC margins and the difference in Minnesota vs national yield growths has been modestly negative at -0.42.
How should we interpret this data? Why do yields in Minnesota seem to grow faster than the U.S. yields when margins are lower? The causality here likely runs in reverse, not from margins to yields, but from yield shocks to margins. When upper Midwest experiences unanticipated good weather and our milk yields grow more strongly than national yields that creates a downward pressure on IOFC margins. When heat stress or poor harvests create a situation not conducive to milk production growth in Midwest, and our yield growth lags behind national, milk shortage results in temporarily elevated IOFC margins as markets send signals that more milk is needed.
Bear in mind that the relationship between IOFC margins and yields is a rather complicated one and the explanation offered above is hardly the only mechanism that could be in play. For example, if less efficient producers tend to exit the industry when margins are low, we could see higher state-level yield growth in poor times even as the state dairy herd is contracting. For analysis that can speak about causality more convincingly one would need to go beyond state-level reports and use individual farm data.
October 2013 Milk Production Report
This week’s Minnesota in Numbers was produced with financial support from Dairy Star and Minnesota Milk Producers Association. Maggie Jennissen assisted in assembling the data.
The purpose of the proposed Dairy Market Stabilization Program (DMSP) is to shorten the duration of low-margin periods and reduce government outlays on dairy margin insurance. However, DMSP can only achieve those goals if producer participation in the proposed dairy safety net is sufficiently high. In 2012, farms with over 1,000 cows accounted for only 2.9% of operations but produced 50.6% of the milk. Therefore, it is of particular interest to understand views of large herd operators regarding participation in proposed dairy programs. To that end, a survey was conducted of dairy farm manager participants at the Dairy Today magazine’s 2013 Elite Producer Business Conference held on November 11-13 in Las Vegas. Eighty-six surveys were completed. The respondents averaged a herd size of 3,351 cows and 2,449 acres of operating farmland.
To examine the influence of program implementation rules on participation rate, participation likelihood was measured under two scenarios: 1) sign up by January 15 for the calendar year that just began and 2) sign-up by March 15 for the forthcoming fiscal year (Oct 1 – Sep 30). Both implementation rules provide the same inherent risk protection effectiveness, but the former rule allows producers to utilize more information about how much risk they will likely face. A sign-up rule that essentially coincides with the start date allows producers to use easily, and more reliably forecasted margins to strategically adjust margin coverage levels. Thus, they can choose less insurance when risks seem small, and buy high coverage levels when low margins are imminent.
For a January 15 signup date for a calendar year program, the share of survey respondents either neutral or leaning towards participating in the Senate and the House versions of the dairy title was 66% and 78%, respectively. Assuming March 15 as the signup date for a fiscal year program, the share of producers neutral or leaning towards participation was 55% and is equal for both the House and the Senate versions of the bill. One way to interpret this is that up to 20% of large producers did not perceive the new safety net as necessary for viability of their business, but would be willing to engage in opportunistic participation in some programs if there are gains to be made.
This survey provides only limited evidence on stated attitudes of large herd operators; nevertheless, it is possible to make at least partially informed or conjectural projections of a U.S. participation rate. If we assume that all producers leaning positive will participate in the Farm bill dairy programs, and that half of undecided producers will also sign up, between 35% and 47% of large herd operators would sign up for the Senate version of the dairy programs, but the House version would see enrollment between 40% and 57%. Because both programs offer higher margin insurance subsidies for the first four million pounds of milk, it is reasonable to assume that participation rate among producers with smaller herds will be higher. If 85% of producers with herds under 200 cows sign up, and if assume participation rate of producers with herds between 200 and 1,000 cows is 1.5 times the surveyed participation rate of large herd operators, then we can estimate that the total participation in the Senate proposed dairy programs will be 50% of U.S. milk production, if the program is implemented with a March 15 sign up date for a fiscal year coverage period. For the alternative scenario of a January 15 sign up date and a calendar year insurance period, the speculative estimate is that slightly over 60% of U.S. milk would sign up. Bear in mind that market conditions at signup, the extent to which respondents really do as they stated in the survey, implementation details, and any program changes that might occur in conference committee will likely have significant effects on participation rates. Perhaps the best way to view these results is as a prior or preliminary estimate that will be updated as new information arrives.
Read more in the DMAP Briefing Paper Chris Wolf and I released today.
Number of the Week: 8.5%
Gross income received by Minnesota milk producers for milk produced in 2012 was 1.15 billion dollars, which constitutes 8.5% of total Minnesota agriculture gross income.
An overview of top ten milk producing states reveals that gross income from milk production represents the highest share of agricultural cash receipts in New York and lowest in Texas (click on image to enlarge it).
The share of Minnesota farm gross income from milk production declined from 27.8% in 1930, 21.2% in 1960, 19% in 1990 to 8.5% in 2012. The declining share of farm cash receipts from milk in Minnesota is due to increasingly vibrant and versatile agricultural economy in our state. Speaking at the Farm Bill conference committee meeting on October 30th, Sen. Klobuchar told her colleagues that when compared to other states, Minnesota is “number one in turkeys, number one in sweet corn, green peas and oats, number two in hogs and spring wheat, number three in soybeans, and number four in corn.” Minnesota is also number seven in milk production. In our state, dairy is the second largest livestock sector, and a fourth largest commodity overall.
This week’s Minnesota in Numbers was produced with financial support from Dairy Star and Minnesota Milk Producers Association. Maggie Jennissen assisted in assembling the data and writing the commentary.
with John Newton and Cameron S. Thraen
This brief summarizes the state of the knowledge on proposed dairy policy reforms, building on five working papers from three different research teams. The key findings relate to the effectiveness, expected cost, distributional effects and policy design shortcomings of the proposed reforms:
- Both the proposed 2013 House and Senate Farm Bills are likely to be very effective in providing catastrophic dairy margin insurance. If effective, the Senate stabilization program could also reduce the duration of low‐margin periods.
- Contrary to other Farm Bill commodity programs, these dairy reforms impose no eligibility constraints with respect to farm size or adjusted gross income. The costs of the new policies are estimated up to be up to three times higher than the cost of extending the 2008 Farm Bill dairy programs, with larger share of program benefits accruing to large farm operators. The Senate stabilization program could reduce costs of 2013 Farm bill dairy programs between 5% and 30% relative to standalone margin insurance, with results highly sensitive to market price responsiveness to reductions in milk supply.
- If the current policy proposals enable dairy producers to make the annual insurance sign‐up decisions immediately before the insurance coverage period starts, they will encourage producers to use the new programs strategically – over‐insuring when anticipated income over feed costs margins are likely to be much below average, and forfeiting margin insurance when forecasted margins are above average. This design feature unnecessarily increases program costs by at least 20%, and can be easily addressed in several ways. One option discussed in the brief is to introduce a six‐month gap between the annual sign‐up date and the beginning of the insurance coverage period. This change would preserve low and affordable premium levels, while realigning program design with the original purpose of the policy reform – offering affordable catastrophic risk protection.
Number of the Week: 35.3%
According to the USDA, purchased feed costs constitutes only 35.3% of total dairy feed costs in Minnesota, with majority of costs due to homegrown harvested feed (valued at market prices). This is the lowest percentage in the entire nation.
Last week, USDA Economic Research Service released an update to state-level Milk Cost-of-Production estimates. Of the 23 major milk producing states, Minnesota stands out as the state with the lowest percent of feed costs attributable to purchased feed.
In Minnesota, 64.7% of the livestock feed value comes from feed grown on the farm (valued at market prices). That exposes Minnesota farms to increased production risk, such as winter-kill loss of alfalfa; this year, Minnesota lost about 750,000 acres of alfalfa. On the other hand, growing most of the needed feed gives our dairies more financial stability in face of highly volatile feed costs, as experienced in 2012 and 2013.
The map above (click to enlarge) also makes clear why it is very hard to design one-size-fits-all federal dairy policy that would make everyone happy. For dairies in western states, it may be more important to protect income over feed costs, while many smaller Minnesota dairy farms likely care more about having milk price risk protection. Furthermore, more variable year-to-year milk production due to feed production risk, as well as higher fixed (and lower variable) costs of production, may imply that Midwest dairies have higher adjustment costs when Dairy Market Stabilization Program is triggered.
Number of the Week: 19,200
The increased number of milking cows in three of the Minnesota counties located in the I-29 Dairy
Corridor from 2001 to 2013.
Since the year 2000, only a few milksheds in the U.S. were showing substantial growth in dairy herd size. In addition to the usual suspects (California, Idaho, Texas, eastern Wisconsin, etc.), the I-29 Dairy Corridor stands out in the Upper Midwest region with substantial promise for dairy development.
Encompassing a dozen counties in South Dakota, Minnesota and Iowa, the I-29 corridor has seen a net growth in dairy herd size of 50,200 cows between 2001 and 2013 (click the image to enlarge it). According to some projections, due to the growth in the dairy processing capacity, the region could easily add another 100,000 dairy cows over the next decade. The I-29 growth is often thought of as primarily a South Dakota and Northwest Iowa phenomenon, due to these states’ sustained and successful efforts in attracting relocating dairies from Europe and western U.S. states. However, a closer look at the county-level growth in dairy herds, reveals that the three Minnesota counties illustrated in this map actually grew more than either the seven counties in South Dakota or the three counties in Northwest Iowa.
Bottom-line, where local community is supportive of the dairy industry, Minnesota can be as successful as any state in dairy development.
An article by Dr. Mark Stephenson on growing milksheds in the U.S.
Dairy Situation and Outlook in the I-29 Corridor – presentation I delivered by at the 2013 North Central Cheese Industry Association conference.
Agropur to Expand – an article in Dairy Star, Mar 11, 2013
This week’s Minnesota in Numbers was produced with financial support from Dairy Star and Minnesota Milk Producers Association. Data Source: National Agricultural Statistical Service, U.S. Department of Agriculture. Maggie Jennissen and Ali Bittinger assisted in making this week’s Minnesota in Numbers.
Number of the Week: -5.1%
Minnesota fluid milk sales were 5.75 million gallons for the 4 weeks ending September 8, a decline of 5.1% compared to the same period a year ago.
For many years, U.S. fluid milk sales per capita were declining, but total volume sales were stable due to population growth. Has that relationship broken down in the last three years, as the figure above seems to suggest (click to enlarge)? Consider a 12-month rolling monthly average of national fluid milk sales. Since the peak at 4.56 billion lbs in January 2010, sales declined by a quarter billion pounds per month to 4.31 billion lbs in June 2013, the last month for which USDA data is available.
In my opinion, there are really two effects at play here. First is a continuation of secular declining trend in fluid milk consumption, due to change in consumer preferences and demographic composition of the U.S. population. Second effect is due to consumer reaction to higher milk prices in recent years. Due to high feed costs over the last few years, milk prices have been historically high, and consumers reacted by buying less milk.
It needs to be pointed out that long-term trends and short-term price-effects have very different results for dairy producer milk checks. Long-run trend of declining milk consumption leads to reduction in dairy producer revenues from Class I utilization. To the contrary, recent decline in volume sold due to higher Class I prices is modest compared to price changes. While Minnesota fluid milk sales fell by 5.1%, total revenue from sales actually went up by 2.1%, benefiting dairy producers. This suggests that the recent decline in milk consumption is mostly due to historically high fluid milk prices, rather than accelerating change in consumer preferences. If Class I prices moderate next year due to lower feed costs, I would expect fluid milk volume to show much more stability in the short run.
This week’s Minnesota in Numbers was produced with financial support from Dairy Star and Minnesota Milk Producers Association. Data for Minnesota fluid milk sales data extracted from September 2013 MilkPEP Monthly Sales Topline Report. Maggie Jennissen assisted in making this week’s Minnesota in Numbers.