Know Your Market
A Risk Management Opportunity: Livestock Gross Margin for Dairy
Jan 24, 2011
Learn how this dairy insurance policy can manage the risk of falling milk prices and rising feed costs.
By Marv Carlson, Dairy Gross Margin, LLC
Looking for a way to manage the risk of falling milk prices and rising feed costs?
Looking for opportunities to protect your operation without the risk of making margin calls?
Livestock Gross Margin for Dairy (LGM), administered and underwritten by USDA’s Risk Management Agency (RMA), may provide a great risk management opportunity for you.
What does it do? This dairy insurance policy manages the risk of falling milk prices and rising feed costs.
LGM products can be tailored to a wide range of dairy operations. These products are bundled options that insure the producer’s gross margin over the period of insurance. LGM for Dairy is a package, like bundled options -- you have a corn call, a soybean meal call and milk put bundled together with no off-setting CME or CBOT transactions to create market shift.
When compared to options, LGM may be a better fit since options cover fixed amounts of commodities, and those commodity contracts may be too large for risk management strategies for some dairies.
What is the Margin?
Your Expected Gross Margin (insurable margin) is the average price of milk (in hundredweights) that you choose to insure, minus the average price of corn and soy meal times the tons of corn and soy meal you choose to insure. The average of the milk, corn and meal closing prices from Wednesday, Thursday and Friday, prior to sales day, is used in the estimated insurable gross margin calculation.
When Can I Buy LGM for Dairy?
LGM for Dairy insurance is offered for purchase at the end of each calendar month on the last business Friday. (The next sales day opportunity is Jan. 28, 2011.) You can insure one month or a combination of months up to 10 months each sales day.
The window of time for purchase is fairly short since USDA’s RMA reviews the market data for milk, corn and soybean meal after the close of markets on the last business Friday (sales day) of the price discovery period and the sales period ends Saturday.
Preparation for participation includes knowing a reasonable estimate of your expected cost of production, calculating feed needs for the insurance period and estimating monthly marketings of milk. You do not have to insure all of the milk you expect to produce for a given month at one time. You can insure a percentage of each month’s production several times throughout the year. The maximum insurable production is 240,000 cwt. or 24 million pounds in each crop year. A Federal Crop Insurance year runs from July 1 through June 30.
Paper work is limited but be prepared to pay the insurance premium at the end of the policy period. The premium goes into a pool held by RMA for payment of indemnity. Your premium is subsidized if you insure two or more months and the percentage of the premium subsidized increases from 18% to 50% as you select higher deductibles.
In future editions of Dairy Today eUpdate, we will take a closer look at the details of LGM for Dairy.