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Dairy Gross Revenue Insurance Complex

May 17, 2010
By: Jim Dickrell, Dairy Today Editor
The National Milk Producer Federation's 2012 Farm Bill package includes a modified version of Livestock Gross Margin-Dairy (LGM-D) gross margin insurance.
Dairy economists from the Universities of Missouri (UM) and Wisconsin have prepared a Policy Brief analyzing the pros and cons of such a national program. In essence, LGM-Dairy pays an insurance indemnity equal to the difference, if positive, between the gross margin expected at producer sign-up and the gross margin actually experienced.

The NMPF plan would subsidize premiums for the insurance, with the government paying for all premiums at for a $3/cwt margin. If producers wish a higher level of protection, they would be required to pay for it.
The issues?
Level of guarantee. Depending on the level of the gross margin guaranteed and market conditions, the premiums and thus government costs could be significant. In addition, a "one margin fits all” approach might not solve income variability problems for producers, given the wide range of differences among operations across the country.
•  Returns. Calculating anticipated and actual milk revenue and feed cost is difficult. How these values are determined affects both the costs of the program and the degree to which the program can reduce revenue variability on individual farms.
Contract flexibility. There are tradeoff between program flexibility and administrative ease/costs.
Indemnity period. Producers prefer monthly indemnity determinations, but this would significantly increase program and premium costs given increased month risk.
Program complexity. Gross margin insurance is a new concept and will require much more producer involvement than the Milk Income Loss Contract program. An aggressive producer education effort will be required.
For the complete policy briefing and more background information, click here.

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