John Newton, Cameron S. Thraen, Marin Bozic, Mark W. Stephenson, Christopher Wolf, and Brian W. Gould; Midwest Program on Dairy Markets and Policy - 2013 Farm Bill Dairy Analysis Group
Executive Summary
This paper reports our analysis to-date of expected short-term impacts of 2 major dairy safety net policy proposals popularly referred to as the Dairy Security Act (DSA) and the
Goodlatte-Scott Amendment (G-S). Our results suggest that both DSA and G-S are very effective in providing catastrophic risk insurance and revenue enhancement for farms with stable and moderately growing milk marketings.
For sufficiently high DSA participation rate and sufficiently low price-elasticity of demand for milk in aggregate, the Dairy Market Stabilization Program (DMSP) has the potential to reduce government outlays and accelerate margin recovery in low-margin states of the world, relative to outcomes expected under DSA with low participation rates and high price-elasticity.
Furthermore, the DMSP is not likely to provide long-term obstacles to growth for participating farms with an aggressive growth plan unless generous margin insurance induces a long-term
oversupply of milk. Our analysis suggests that under the provisions of G-S effective catastrophic margin insurance for aggressively growing farms is limited due to the fixed production history.
However, more complete margin risk protection may still be possible using private risk markets to complement government provided insurance.
Both programs share contract design features that may result in strategic annual supplemental margin protection sign-up and reduce demand for private risk insurance products, inadvertently increasing policy cost. Under DSA, this problem is somewhat reduced as DMSP provides disincentives for forfeiting supplemental margin insurance in years when anticipated margins are moderately above the long run average.
The analysis is parsimonious in structural model assumptions and relies on expected market conditions as reflected in Chicago Mercantile Exchange futures and options prices. As such, our primary focus is on expected short-run effects flowing from these alternative programs. The long-term impacts of these programs on the growth of milk supply, dairy exports, and liquidity of private dairy risk markets are among important open questions that we do not attempt to address.