In what he thought might be his first presentation after the Margin Protection Program for Dairy (MPP) deadline, Marin Bozic urged producers to make a decision soon on risk management for 2015. Bozic is an assitant professor in dairy foods marketing economics at the University of Minnesota. He reminded a crowd of about 400 registrants at the 2014 Vita Plus Summit yesterday held in Red Wing, Minn., that, “If you don’t make a decision, you have made a decision to carry more risk than ever. Times have changed.”

Bozic’s presentation asked for dairy producers in the crowd to answer a handful of survey questions using their cellphone as voting tools in real time. The producers in the crowd were Vita Plus clients and prospective clients, ranging from Minnesota to Ohio.

The clientele at the meeting may or may not have represented farms of all sizes, but when asked whether they would sign up for MPP, latest results during the presentation showed 62% would, 12% might, and 26% would not, of 73 respondents. Of those, a plurality was signing up for the $4 minimum coverage, but the majority signed up above $6.

On the topics of culling, expansion, and hedging, respondents in the crowd overwhelmingly said they will continue their current plans and actions despite MPP-Dairy.

Bozic noted that the decision making shown by the crowd was not similar to that he experienced over the phone counseling large dairy farmers who he said seem to want a third-party push to sign up.

The question, as Bozic phrased it, is “Will you come back a year from now and say, ‘I was penny wise but pound foolish?’”

Margin Protection Level Respondents
$4.00 21 (40%)
$4.50 1 (2%)
$5.00 2 (4%)
$5.50 0
$6.00 12 (22%)
$6.50 13 (25%)
$7.00 0
$7.50 2 (4%)
$8.00 2 (4%)
Source: Marin Bozic 2014 Vita Plus Summit instant poll, preliminary results

The West can be won

Responding to recent reports that MPP is essentially useless for Western dairies, Bozic noted that such reports are only looking at part of the equation, and potentially the wrong part.

“Using only basis is incorrect,” Bozic explained. “You have to analyze the margin you need. And because Western states have lower “other” operating costs, due partially to size, those dairies need lower income over feed costs margins to break even.”

For 2009, analyzing a dataset provided by accounting firms, Bozic noted that while the Upper Midwest could have saved 71% of losses for the year, states like Texas, Idaho, and California could have protected against about 50% of losses.

Some nonpublic data leaked by USDA gives us a look into the early signups for the Margin Protection Program for Dairy (MPP), with a new deadline. It appears that some of the larger-herd states are heeding Bozic’s advice.

Bozic shared that although the data typically remains within USDA offices, numbers first reported by Hoard’s Dairyman showed both New Mexico (64%) and Texas (75%) as the only two states above 50% participation among dairy farms, as of December 3. Trailing those leaders are Nebraska (46%), Minnesota (42%), California (32%), Wisconsin (30%), Idaho (18%), and Pennsylvania (16%).

Last week, USDA extended the deadline for signups from December 5 to next Friday, December 19, giving producers more time to decide, which coincidently corresponded with falling prices.

MPP subsidies are implied

A final point Bozic made was contention that MPP is not subsidized enough. But,  in comparison to private trading and hedging products, Bozic showed that it depends what coverage level you buy.

“At $6 margin, protection is cheaper through USDA. At $7 or $8, the private sector wins,” Bozic said. “With MPP, we’re trading flexibility for simplicity. That’s a lesson, likely a good one, learned from the experiences with LGM-Dairy program.”

Suggesting that there is opportunity in the private contracting markets, Bozic noted that extreme prices often do not head in the direction until 6 months before their delivery date. “Consistent opportunity comes when you hedge 9 to 11 months out,” Bozic said.