Livestock Gross Margin Insurance for Dairy: Pt.1
Benefits of LGM-Dairy
LGM-Dairy is a program administered by the USDA’s Risk Management Agency, but LGM-Dairy policies are purchased from firms selling federal crop insurance. Crop insurance agents must be certified to sell LGM-Dairy and have an identification number on file with the Federal Crop Insurance Corporation. A list of approved agents can be obtained from a University of Wisconsin website -- http://future.aae.wisc.edu; click on the “LGM-Dairy” tab, then click on the “List of LGM-Dairy Providers.”
Livestock Gross Margin Insurance for Dairy is available for purchase each month (12 contracts/year) and each contract covers from 1 to 10 months (Figure 4 on page 23). Unfortunately, LGM-Dairy has a very short period each month when the product can be purchased. The LGM-Dairy purchase period starts at the end of the last business Friday of each month and ends at 9:00 p.m. ET the next day (Saturday); therefore, there is only about a 27-hour sign-up window every month. This makes it critical that producers work with their insurance agent in advance of the sign-up period.
Overview of LGM-Dairy
Feed usage in LGM-Dairy is expressed as corn and soybean meal (SBM) equivalents. The LGM-Dairy program allows the producer to select from a wide usage range for these two feed equivalents. The producer may choose any feed usage numbers desired, even if they do not accurately represent their farm’s actual feed usage, as long as they stay within the LGM-Dairy’s feed usage limits. If desired, producers may also convert the portion of their dairy rations that are not corn or SBM (for example, homegrown feeds like corn silage or haylage) to corn and SBM equivalents. The University of Wisconsin “Understanding Dairy Markets” website has software available to convert a wide variety of dairy feeds to corn and SBM equivalents.
Doing the Calculations
Like most insurance, LGM-Dairy allows the producer to select a deductible. The higher the deductible selected the more risk the producer assumes, but the lower the premium becomes on the LGM-Dairy contract. Deductibles are available from $0.00/cwt of insured milk to $2.00/cwt of insured milk in $0.10/cwt increments. As LGM-Dairy deductibles increase the amount of insurance premium subsidy also increases (Table 1). The premium subsidy is expressed as the percentage the premium is reduced to. For example, if a $0.50/cwt deductible is chosen, the premium for that covered month would be reduced by 28%. A producer must have targeted marketings in 2 or more months to qualify for the premium subsidy.
Once the deductible is selected it is possible to calculate the gross margin guarantee (GMG). Gross Margin Guarantee = GM minus deductible. The deductable is the portion of the GM you choose to leave unprotected.
The final calculation needed in the LGM-Dairy program is the actual gross margin:
The futures markets also are used to determine the actual milk, corn, and SBM prices. Very importantly the LGM-Dairy program uses no actual farm level prices, involves no futures market transactions, and no local basis is used to adjust commodity prices. Actual prices for Class III, corn, and SBM are the average CME futures settlement prices for the first, second, and third days prior to the futures contract last trading day.
Let us use October, 2011as an example: The last trading day for corn and SBM futures is Oct. 14, so the actual October corn and SBM prices will be the average futures settlement prices for Oct. 11, 12, and 13. The last trading day for Class III milk is Oct. 30, so the actual October Class III price will be the average futures settlement prices on Oct. 27, 28, and 29.
In LGM-Dairy an indemnity payment occurs when the total actual gross margin (AGMTotal) for an LGM-Dairy contract period is less than the total gross margin guarantee (GMGTotal). That is, an indemnity (payout) occurs if: AGMTotal < GMGTotal.
It is important to remember that there is only one AGMTotal and one GMGTotal per LGM-Dairy contract, thus, the contract is evaluated over the entire contract period. In other words, indemnity payments in months where the AGM is less than the GMG may potentially be offset by other covered months where the AGM is greater than the GMG.
Table 1: LGM-Dairy insurance deductibles and premium subsidies.
Click image below to enlarge
Gould, B. W. and V. E. Cabrera. 2011. LGM-Dairy: A Risk Management Tool for Small and Large Dairy Farms. Univ. of Wis. Understanding Dairy Markets website (http://future.aae.wisc.edu/lgm-dairy/ppt_files/generic_pt1.ppt ).
Gould, B. W. and V. E. Cabrera. 2011. LGM-Dairy Analyzer: An Integrated Software System for Use with LGM-Dairy. Univ. of Wis. Understanding Dairy Markets website (http://future.aae.wisc.edu/lgm-dairy/ppt_files/generic_pt2.ppt ).
Valvekar, M., V. E. Cabrera and B.W. Gould. 2008. LGM-Dairy: Livestock Gross Margin Insurance for Dairy, a New Risk Management Tool Available for Wisconsin Dairy Producers. Univ. of Wis. Dairy Management White Paper. August 2008.
United States Department of Agriculture. 2010. Livestock Gross Margin Insurance: Dairy Cattle. A Risk Management Agency Fact Sheet. Program Aid Number 2021. June 2010.
Dairy Extension Educator Coverage