We’ve been hearing more about how the Livestock Gross Margin for Dairy, or LGM-Dairy, insurance program is being made easier and more convenient to use. But isn’t it more convenient to just contract milk through my cooperative to cover the same risks?
Mike Evanish: Dairy LGM doesn’t insure your individual margin over feed cost. It protects you based on the “industry’s margin.”
This is done either by accepting the average feed consumption assumed in the insurance product, or based on a calculated feed consumption based on your actual feed program. In most cases, the average assumed is a great and simple choice.
Once it’s purchased, you run your dairy business as usual. You’re paid based on the cash market, and paid for feed based on past practice. No tracking or management changes are required.
Contract results are calculated monthly. LGM can cover one month or last up to 10 months.
Whatever the time frame, at the end of the period, a calculation is made to determine if the purchaser is in or out of the money.
If the markets moved against the producer, a check is mailed. If the markets moved in favor of the producer, a bill is mailed for the insurance premium.
To compare this to contracts with the cooperative, the co-op contract locks in a price.
Should the cash price move higher, the producer loses out. Should the price move lower, the producer is paid the higher price.
LGM locks in the margin between milk price and feed cost based on futures prices on the day of purchase. Margin is certainly not the same as milk price.
LGM has greatly increased in popularity due to two major changes. The first is a government subsidy that makes it far more affordable. The second is that the premium is not due until the end of the contract. This is much better for a producer’s cash flow.
Dale Johnson: I’ve been encouraging dairy farmers to consider LGM-Dairy. It’ll help smooth out your income through unexpected market fluctuations.
The premiums you pay will insure you against unexpected drops in milk prices and/or increases in feed prices. Since the federal government is subsidizing premiums, it’s likely that over the long term you’ll receive more in indemnity payments than you pay in premiums.
Do your homework to understand LGM dairy. A good place to start is: www.rma.usda.gov/pubs/rme/lgmdairy.pdf. Penn State University also has several publications on line to help at: cropins.aers.psu.edu/lgmdairy.htm.
To take advantage, I suggest:
• If you want to purchase it this year, do it sooner rather than later.
• Develop a consistent strategy. Insure some of your production for all available months, purchasing in increments each month.
• Get an insurance agent that understands it. He/she can help you formulate a strategy, and will reliably enroll you the last Friday of each month.
• To get greatest benefit from the premium subsidies, choose a deductible level between 50 cents (28% premium subsidy) and $1.10 (50% premium subsidy).
George Mueller: It’s much better to remain silent and be thought a fool, than to open my mouth and remove all doubt. But as usual, I do have some thoughts to share.
There seems to be a movement afoot to replace our milk price-support “safety net” with government-subsidized margin insurance. Getting rid of price supports makes sense. A prosperous future in our dairy industry will depend on dairy exports.
With dairy price supports, we only export until the world price falls to our support-price level. At that point, we sell to our government and lose our overseas customers to a more dependable supplier.
Also, our price-support system acts as a floor for the whole world. Our government-held products in storage depress our dairy prices. The time has come for us to end our dairy price-support program and become a consistent worldwide supplier of dairy products.
LGM has been greatly improved. I just don’t like government tinkering with our markets (other than Federal Milk Orders that encourage competition). But perhaps margin insurance will do a lot less damage than the present price-support program.
Fixing future milk prices through your co-op is certainly simpler, and lets the co-op worry about margin calls and commissions. However, who wants to fix when milk is $13?
In 2007, we watched the market go from $13 to $17. That $17 was a very good price, so we fixed.
Then the market then went to $18, $19, $20, $21 and finally $22 before it quit.
We were stuck at $17 and the producer price differential turned a negative $3. So we got $14 for our milk.
Don’t try to outguess the market. We tried and it cost us.
My advice is run your farm efficiently. Keep a strong balance sheet. Pay down debt in good times and live off depreciation in the tough times. Stick to what you know best — farming!
This article published in the April, 2011 edition of AMERICAN AGRICULTURIST.