Changing Structure, Financial Risks, and Government Policies for the U.S. Dairy Industry

Transcription

1 Changing Structure, Financial Risks, and Government Policies for the U.S. Dairy Industry James MacDonald USDA Economic Research Service Briefing to the OECD Network on Farm-Level Analysis Tallinn, Estonia June 2015 (A Summary of a Forthcoming ERS report by James MacDonald, Jerry Cessna, and Roberto Mosheim)

2 Focus of the Report Dramatic structural change in dairy farming Impacts on costs, competitiveness, politics Expanding price volatility and risk Changing dairy product markets Greater international exposure Major changes in policy In response to risks and to structural change How will policy changes affect the industry? 2

3 Milk Cows Structure: Changes in Herd Size, Midpoint herd size Mean herd size Half of all cows in herds larger than the midpoint, and half are in smaller herds. The mean is the number of cows, divided by the number of farms Source: USDA/NASS, census of agriculture records

4 $ or % On average, larger dairy farms realize lower costs and higher profits Average cost ($ per hundredweight) Returns exceed costs (% of farms) $ $30.24 $ $ $18.09 $16.37 $ ,000-1,999 >1,999 Herd size (number of milk cows) Source: 2010 USDA Agricultural Resource Management Survey 4

5 Effect of Structural Change on Industry-Average Production Costs Herd size (milk cows) Average cost, 2010 Shares of production (%) $ $ $ $ $ ,000-1,999 $ >1,999 $ Industry Average Cost $24.00 $19.85 $

6 Dairy Product Markets Steady and ongoing shift away from fluid and toward manufactured products Some movement to more differentiated products and to dairy ingredients May undermine domestic pricing assumptions And, a large expansion of commercial exports Greater international exposure 6

7 U.S. domestic price / Oceania export price U.S. Nonfat Dry Milk & Skim Milk Powder Exports and the U.S./Oceania Price Ratio U.S. commercial exports U.S. subsidized exports U.S. price / Oceania export price Exports (million pounds) 3,000 2, , , , Sources: U.S. Census Bureau, USDA Agricultural Marketing Service, USDA Agricultural Statistics Service, USDA Economic Research Service

8 $/cwt 30 Monthly Milk Prices Received by U.S. Farmers, Source: NASS Quick Stats, all-milk price

9 $/cwt Monthly Milk Prices and Feed Costs, Milk prices (NASS, all-milk) Feed prices (NASS corn and alfalfa, AMS soybean meal) Sources: USDA/NASS and USDA/AMS, as noted

10 Return on Equity (%) 20 Dairy Farm Profitability, By Herd Size Class, Herd Size (Milk Cows) Source: USDA Agricultural Resource Management Survey, all versions,

11 Debt Position of Dairy Farms, Mean Debt to Asset Ratio (%) Percent with Debt of at Least 60% of Assets Percent with Debt Repayment Capacity Less than Zero All farms All production Herd Size (milk cows) -Percent of Farms > Source: USDA, Agricultural Resource Management Survey, all versions,

12 Ratio 1.4 Quarterly Milk Production, Billion lbs. 60 Ratio, to 4 quarters before (left axis) Milk production, quarterly (right axis) production fell, modestly, from 2008 levels Source: National Agricultural Statistics Service, Milk Production 20

13 1.2 Quarterly Domestic Marketings, Exports, and Stocks, Exports (right axis) Ratios, to 4 Quarters Earlier Marketings (left axis) Beginning Commercial Stocks (right axis) I 2007 III 2008 I 2008 III 2009 I 2009 III 2010 I 2010 III 2011 I 2011 III 0 Source: ERS Dairy Database

14 Summary So Far 2009 margin crash was a watershed event Price risks... And liquidity risks, focused on large farms Policy had been focused on countercyclical support focused on small producers That was about to change 14

15 Major Changes in U.S. Dairy Policy 2014 Farm bill eliminated: Dairy Product Price Support Program Dairy Export Incentive Program Milk Income Loss Contract (MILC) Program Farm Bill introduced: Margin Protection Program Dairy (MPP) 15

16 MPP is Styled as an Insurance Program Catastrophic coverage, margins<$4 90 percent of historic production, $100 fee Buy-up coverage percent of historic production $4.50 to $8 margin For premiums Based on national-average milk-feed margin 16

17 Premium Structure for the Margin Protection Program Margin threshold, per cwt Tier 1 Premium, 2014 and 2015 CPH up to 4 million lbs. Tier 1 Premium, CPH up to 4 million lbs. -$ per cwt- Tier 2 Premium, CPH > 4 million lbs. $4.00 None None None $ $ $ $ $ $ $ $ Source: USDA Farm Service Agency Notes: CPH is covered production history. Farms enrolled in MPP-Dairy pay an annual $100 administrative fee, but pay no premiums for catastrophic coverage (a $4 margin covering 90 percent of production history). 17

18 2015 Enrollment in the Margin Protection Program Margin threshold Number of operations Production history (million lbs.) Covered production (million lbs.) Covered production as percent of history $ ,888 97,091 87, $ $ ,534 5, $ ,803 2, $6.00 3,828 29,584 24, $6.50 6,457 22,306 17, $ , $7.50 1,430 4,229 3, $ , Total 24, , , Source: USDA Farm Service Agency Notes: Covered production is the share of production history that is covered in MPP-Dairy. 18

19 Issues for MPP Impacts on supply response? Will it exacerbate price volatility? Short run and long run issues Farmers re-select coverage each year Pick catastrophic ($4) in expected good year Pay premium, pick $6-8 in expected bad year Impact on taxpayer costs? Impact on supply response? Short run design (4 year expiration) How to handle structural change? 19

20 Contact: Questions? James MacDonald: 20