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Time to check your floors: June-July risk management calendar

Ron Mortensen for Progressive Dairy Published on 17 June 2020

What does your floor look like? The barn floor? The creaky floor in the haymow? The old feed room floor that now has cracks and grass growing in it?

No – I mean your financial floor. Dairy Revenue Protection (Dairy-RP), Livestock Gross Margin for Dairy (LGM-Dairy) and the USDA’s Dairy Margin Coverage (DMC) program are strong government-backed risk management tools that help set financial floors, providing minimum or guaranteed revenue for your dairy operation. Each has its own unique traits.

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How do you design and install this floor? Most should look at the USDA DMC program, covering up to 5 million pounds of annual milk production. It is relatively inexpensive and will work if milk prices move lower and feed prices move higher. Later this week, the USDA will announce the 2021 DMC enrollment period.

Remember, you can still use LGM-Dairy and Dairy-RP at the same time you’re enrolled in DMC.

Dairy-RP

What will Dairy-RP do for you? It is a subsidized revenue type of insurance that is yield (milk per cow) times quarterly prices. Most use the 95% coverage level. You can get a 95% revenue guarantee for the pounds of milk you choose to insure. You pay a premium for that coverage. Dairy-RP coverage is generally available for milk produced four or five quarters out in the future. The next available quarter is the fourth quarter (October, November and December) of 2020. The last day to purchase coverage for that quarter is Sept. 15, 2020. Currently, coverage for the first three quarters of 2021 is also available.

Dairy-RP is available every day except holidays and days when the USDA releases reports that could impact markets (see calendar) and on days when applicable futures market moves limit-up or limit-down.

061720.natzke risk management calendar

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

If prices fall more than 5% and the milk-per-cow number does not change, you should get an indemnity payment. Remember, if milk prices go higher, you get the higher cash price reflected in your milk check.

The USDA’s Risk Management Agency (RMA) has been on a mission to improve livestock insurance policies. Here are some of the changes starting July 1, 2020:

1. The declared protein range will be 2.75%-4.5% (increased from 2.75%-4%).
2. The declared butterfat range will be 3.25%-5.5% (increased from 3.25%-5%).
3. Component pricing will be available for Class IV milk because nonfat solids have been added.
4. Grade B milk will now be insurable.

LGM-Dairy

There are some differences between LGM-Dairy and Dairy-RP. Like Dairy-RP, LGM-Dairy is subsidized and backed by the RMA. However, LGM-Dairy is a margin product, meaning it will guarantee the income margin between milk and feed. If the price of milk falls and the prices of corn and soybean meal rise, you could get an indemnity. Like Dairy-RP, LGM-Dairy provides a floor to protect you. If milk prices go higher, you will get the higher prices in your milk check.

LGM-Dairy also provides some flexibility, allowing you to select a zero deductible. It also allows you to put in different amounts of corn and meal. The feeding amounts are independent of what your actual feed. LGM-Dairy is available only once a month, the last Friday of each month. The next sales period will be June 26, with the data and premiums released at 4:30 p.m. (Central time) or later.

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Coverage under LGM-Dairy is available for up to 10 months. On June 26, you will be able to buy coverage for August 2020 through May 2021. You need to select coverage in two-month increments to get the premium subsidy. You cannot use LGM-Dairy and Dairy-RP in the same quarter. In some states, premium costs for LGM-Dairy are cheaper than Dairy-RP. The floor price you have built with LGM-Dairy will protect you and your stakeholders if milk prices fall and feed moves higher.

For additional information, read last month’s article.  end mark

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.  

Ron Mortensen

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