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Know Your Market

RSS By: Dairy Today: Know Your Market, Dairy Today

Dairy trading experts offer strategies and practical perspectives to optimize market performance.

LGM for Dairy Revisited

Jun 07, 2013

How would the program’s results have fit into your operation?

ron mortensen photo 11 05   CopyBy Ron Mortensen, Dairy Gross Margin, LLC

These "Know Your Market" commentaries are usually a chance to look forward and to plan for future marketing and risk management strategies. The thought is to continue to look forward at how to make your dairy business financially sound by using several different risk management techniques. Risk management/marketing can be emotional, stressful and time consuming, yet it is a needed task.

Perhaps by looking back occasionally, a producer can become more comfortable with different marketing techniques. Therefore, this is a review of what has happened to LGM-Dairy for December, January, February and March. The analysis is for the October 2012 sales period. Because milk prices moved significantly lower in the December-March period, these policies show good payoffs for that timeframe. Also note MILC did kick in and shows payments for three of the four months.

If you purchased LGM-Dairy in October 2012 for December, January, February and March, the following table indicates the indemnity payouts. If you purchased coverage for more than these four months, the total payout will change. Remember, the indemnity payments are averaged over all of the months you purchase.

Why is this review important? It shows, most importantly, that an LGM-Dairy policy functioned as it should. It provided cash flow when margins contracted. Perhaps a policy was purchased simply because milk was near $20.00/cwt. Maybe it was purchased due to the unknowns about feed costs at that time. Or maybe it was purchased as a systematic step in a marketing plan. How would these results have fit into your operation?

Below you will find a summary of the indemnity payments for average feed inclusion. Your specific results may vary a little based on how much corn and meal you put on your policy. The data and calculations were in part derived from U of Wisconsin LMG Dairy website. You can evaluate your policy by going to http://future.aae.wisc.edu/lgm_analyzer/.

LGM-Dairy Average Corn and Soybean Meal
Purchased Oct. 26, 2012 for the December to March period
1560 cwt. milk, 20.5 tons corn, 6 tons soybean meal
$14.21 average gross margin guarantee
Premium $0 deductible $.60/cwt.
Premium $1.00 deductible $.16/cwt.

Mortensen chart 6 7 13

December
Expected milk prices $20.34, actual prices $18.66, down $1.68/cwt.
Expected corn prices $7.45, actual prices $7.19, down $.26/bu.
Expected soybean meal prices $482.23, actual prices $458.33, down $23.90/ton

January
Expected milk prices $19.53, actual prices $18.11, down $1.42/cwt.
Expected corn prices $7.46, actual prices $7.26, down $.20/bu.
Expected soybean meal prices $482.23, actual prices $458.33, down $66.47/ton

February
Expected milk prices $19.26, actual prices $17.25, down $2.01/cwt.
Expected corn prices $7.46, actual prices $7.32, down $.14/bu.
Expected soybean meal prices $469.32, actual prices $421.86, down $47.46/ton

March
Expected milk prices 18.98, actual prices 17.00, down $1.98/cwt
Expected corn prices 7.47, actual prices 7.39, down $.08/bu
Expected soybean meal prices 462.27, actual prices 433.83, down $28.44/ton

The following charts are a summary of possible policies purchased during the Oct. 26, 2012 sales period:
Mortensen   Oct 2012 Avg Feed  1 deduct May Settled 6 13a

Mortensen graph   Oct 2012 Avg Feed  0 deduct May Settled 6 4 13b


Ron Mortensen is principal of Dairy Gross Margin, LLC, an agency that specializes in LGM-Dairy products and owner of Advantage Agricultural Strategies, Ltd., a commodity trading advisor. Contact him at ron@dairygrossmargin.com or visit www.dairygrossmargin.com.

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