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Put risk management on your calendar: LGM-Dairy sales open May 29

Ron Mortensen for Progressive Dairy Published on 26 May 2020

My grandfather would take eggs and cream to the local town grocery store every Saturday night. The grocer gave him a price on the cream; if my grandfather did not like the price, he could not take it home to see if prices were higher next week. When he sold his cream, he was only one step away from the consumer, but he was still a “price taker.”

While milk marketing risks have always been here, the impacts of the COVID-19 pandemic have brought to light many risks in the supply chain and consumer demand. Putting a floor price on all or a portion of your milk can be the first step in moving away from being a “price taker.”

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There are flexible tools to establish a price floor, including two USDA subsidized-premium insurance programs: Dairy Revenue Protection (Dairy-RP) and Livestock Gross Margin for Dairy (LGM-Dairy). Here’s a brief summary of those programs and upcoming dates and coverage period options.

051820.natzke risk management calendar

Click here or on the calendar above to open it at full size in a new window.

Dairy-RP

Dairy-RP is designed to insure against declines in the quarterly revenue from milk sales relative to a guaranteed coverage level. The expected revenue is based on futures prices for milk and dairy commodities, and the amount of covered milk production elected by the dairy producer.

This is a crop insurance revenue product, which has price and yield components. Yield in this case is milk per cow, for each state or region (not your personal milk per cow). Because of this, premiums vary by state or region.

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Dairy-RP offers two revenue pricing options. The Class Pricing Option uses Class III or Class IV milk prices as a basis for determining coverage and indemnities. The Component Pricing Option uses the component milk prices for butterfat, protein and other solids as a basis for determining coverage and indemnities. You may cover 80%, 85%, 90% or 95% of the revenue you wish to insure.

Quarterly endorsements are available for sale daily in the afternoon, except on days the USDA issues reports with key dairy data, including monthly Milk Production, Dairy Products and Cold Storage reports (see calendar above). Quarterly endorsements are not offered if any month’s price within the desired quarter is limit up or limit down.

Currently, Dairy-RP coverage is available for third-quarter 2020 through third-quarter 2021. June 15 is the last day to purchase Dairy-RP coverage on third-quarter 2020 milk marketings.

At the beginning of the price decline, dairy farmers who were not covered bought coverage. Since the milk market has rebounded, more are looking at coverage in 2021. The quick collapse and subsequent quick snapback increased market volatility and, therefore, premium costs.

LGM-Dairy

LGM-Dairy is an insurance product covering both the price of milk and feed. In general, it protects from lower milk prices and higher feed prices. Gross margin is milk price minus feed (corn and soybean meal) prices. Dairymen can purchase a zero deductible policy or up to a $1.10 deductible in 10-cent increments. To be eligible for a subsidy, at least two months of coverage must be purchased. LGM-Dairy pays the difference between the gross margin guarantee and the actual gross margin, as defined in the policy provisions, for milk covered.

The milk prices for LGM-Dairy are three-day averages of Class III futures prices. Three-day averages for corn and soybean meal futures prices are used for the feed side of the policy. LGM-Dairy has flexibility in how much feed dairymen include in the policy they purchase.

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LGM-Dairy is generally sold the last business Friday of the month. The next sales period is May 29, with the data and premiums released at 4:30 p.m. (Central time) or later. During the May sales period, coverage is available for up to 10 months, July 2020 through April 2021.

Most LGM-Dairy policies seem to be purchased to cover the last two to four months available. During the sales period this week, that would be January-April of 2021. Many dairymen purchase policies with the smallest amount of feed available.

Dairy-RP and LGM-Dairy coverage is available through a licensed and trained crop insurance agent.  end mark

Ron Mortensen provides monthly updates on Dairy-RP and LGM-Dairy coverage for the readers of Progressive Dairy. 

Ron Mortensen

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