A New and Dynamic Approach for Forecasting the Margin Protection Program for Dairy Producers

The 2014 Farm Bill offers dairy-producers a new safety net. The Margin Protection Program considers differences between average national prices of milk and feed (corn, soybean meal, and alfalfa). A web-based tool forecasts this margin using derivatives, considering shocks to a commodity’s futures price as differences between the futures price and its terminal/expiration price. Shocks are constructed per time to maturity (delivery horizon); considering one-month up to one-and-half years ahead (18 different shocks per commodity). Rank correlations among shocks are maintained when forecasting prices. However, these correlations are static, ignoring a crop growing season’s new information. We incorporate this new information using time-varying correlations. Moreover, we model dynamic copulas of joint time-varying correlations among newly constructed one-month delivery horizon shocks. Forecasts indicate relative improvement.