DOPP Round IV

Dr. E. Bruce Godfrey
USU Extension Economics Specialist

The variation in milk prices that has occurred the last few years is familiar to most dairymen and is illustrated in the following figure. This variation in prices results in large changes in net returns. In an effort to assist dairymen in managing the risks associated with changes in milk prices the Dairy Options Pilot Program (DOPP) was started in 1999. This program was designed to teach dairymen how they might use the futures market, including options, to help manage the risks associated with fluctuating milk prices.

USDA recently announced that round IV of DOPP would be funded. To be able to participate in this program, producers must 1) reside in one of the eligible counties (i.e., Cache, Box Elder, Weber, Utah, Millard and Sanpete counties in Utah), 2) make application and be approved to participate, and 3) receive training concerning use of this program. The one thing that is different in this round from rounds II and III is that producers who have attended a training session in the past are not required to attend a training session this year. But, a new application for participation must be submitted and approved by USDA. Training sessions for those who have not attended an approved futures/options workshop in the past will be conducted between 1 May and 31 August 2002. Meeting times and locations in Utah will be available from local county agents in the near future. Producers who are not able to attend one of these sessions can still qualify to participate by completing an on-line training package (also available on CD) once the materials being prepared by USDA are available. Details concerning applications and training materials are not currently available, but should be so by mid-May.

No data are available concerning the overall impact of the DOPP program, but the data for 2001 indicate that participation has been mixed (see table below).

Number of dairymen who participated in DOPP and number of options
purchased in selected states and the United States during 2001 (Round III).
Area/State No. of Active
Producers
No. of Options
Purchased
Arizona 2 6
California 12 30
Idaho 8 18
Minnesota 180 709
Oregon 2 7
Utah 4 13
Wisconsin 244 995
United States 763 2742

These data show that participation in Minnesota and Wisconsin was much higher than in all other states. The only other states that had more than 50 active producers were Pennsylvania (62) and Texas (67). The DOPP program pays 80% of the premiums of a put option purchased by a dairyman. In 2001 this amounted to a total of more than $2.6 million nationally. Obviously the amount of the subsidy was less in states such as Utah where relatively few options were purchased. But, the amount of the subsidy ($15,400 in Utah and $22,832 in Idaho) was not small when viewed on a per contract basis. For example, the subsidy received averaged nearly $1000 for each put option purchased nationally ($2.6 million divided by 2742 contracts). Some dairymen who have participated in the DOPP program in either Round II or III have indicated that it has been a profitable activity, but it is not known how much profit or loss has been realized by participants in general.

Several dairymen who have attended training sessions in the past have expressed considerable hesitance about participating because they believed they lacked the skill needed to trade successfully. In an effort to assist these producers two activities are or will be available. First, one or more advanced training sessions will be held for producers in Utah who have attended initial training sessions (producers in other states are welcome to attend). The dates and locations for these sessions will be announced by county agents in Utah, and may also be obtained by sending an email message to bruceg@ext.usu.edu. Secondly, any producer may make �paper trades� by completing the application and trading materials found at the following web site - http://econ.usu.edu/trades. This web based trading site is designed to allow any producer to gain practice in making trades with no financial risk or obligation. ©