Have a happy holiday season! What will be in your Christmas stocking? No coal, I hope. How about cheese, eggnog, butter and gift certificates for your favorite cheese pizza?
The great thing about dairy markets is they evolve. Lately, they have been very volatile as well. Class III milk futures prices moved higher over the first half of December, especially for the first two quarters of 2021. As of Dec. 18, second quarter (Q2 2021: April, May and June) Class III futures prices had some of the price improvement taken away but still averaged the highest in five years. Third and fourth quarters of 2021 still had $17-per-hundredweight (cwt) prices available. (See historical price tables here.)
Risk management products have also evolved over the years. From the crop insurance industry, risk management tools first came in the form of Livestock Gross Margin for Dairy (LGM-Dairy), then Dairy Revenue Protection (Dairy-RP).
Thanks to many of you over the years who have written comment letters to the USDA’s Risk Management Agency (RMA). The industry and RMA have improved these dairy risk management products. Additional comments will be welcome as we move to the next level of risk management.
Click here or on the calendar above to view it at full size in a new window.
Dairy-RP
For Dairy-RP, the most recent changes were adjustments to the milk production per cow calculations in three states. This could have a significant impact on indemnity payments to dairy producers in Texas, Illinois and California. I think it shows the RMA is responsive and helpful to dairy producers’ needs.
Dairy-RP premiums are higher than last year because of the increased volatility in milk markets. These insurance products are based on option volatilities: Perceived increased risk shows up as higher volatility in the option markets. The market fears prices will fall like they did in the middle of the pandemic. Over time, the volatility should move lower as fears subside.
Dairy-RP coverage is generally available for milk produced four or five quarters out in the future. Currently, coverage is available for the final three quarters of 2021 and the first quarter of 2022. Dairy-RP is available every day except holidays and USDA report days that could impact markets (see calendar). Dairy-RP is also not available on days when applicable futures contracts move limit-up or limit-down.
LGM-Dairy
LGM-Dairy is not only a milk price put option, but a call option on the price of corn and soybean meal, providing protection on falling milk prices and rising feed costs. Current LGM-Dairy premiums are also higher than last year because of the fear milk prices will fall and corn and soybean meal prices will rise.
Due to the holidays, December’s LGM-Dairy sales period was held on Dec. 18. The next scheduled sales period for LGM-Dairy is Friday, Jan. 29. Coverage is available for up to 10 months, so you will be able to buy coverage for February-December 2022. You need to select coverage in two-month increments to get the premium subsidy.
Dairy-RP and LGM-Dairy coverage is available through a licensed and trained crop insurance agent. Ron Mortensen with Dairy Gross Margin LLC provides monthly updates on Dairy-RP and LGM-Dairy coverage for the readers of Progressive Dairy.
