LGM-Dairy: Livestock Gross Margin-Dairy

LGM-Dairy is a valuable and flexible insurance product that provides protection against the loss of gross margin (market value of milk minus feed costs) on the milk produced from dairy cattle. Any agricultural producer in the lower 48 states is eligible for the LGM-Dairy insurance program. It is based on a gross margin for a defined future period of time, established when the policy is written, (Expected Gross Margin). When the future period of time comes current, then the actual Gross Margin is calculated. If the actual is less than the expected, an indemnity is due the policy holder.

LGM is flexible from the standpoint that a dairy producer can choose the months for which he wants coverage on his milk production. He can also choose how much of his milk he would like to protect. This is in direct contrast to the Federal USDA Margin Protection Program, MPP, which requires a decision for the entire calendar year as to amount of milk covered, and the dollar margin protected.

Some of the features of the program that a producer needs to be aware of, and must take into consideration when evaluating if LGM fits his diary operation, are as follows:

1. There are 12 insurance periods throughout the year, each defined by a monthly sales period. The last business Friday of the month, starting at 5:30 pm EST and ending the next day, Saturday, 9:00 pm EST.
2. Each policy period is 11 months. In any given policy period, a producer can cover 10 months of milk production. (Ex. January sales month covers February through December. No February milk can be covered. Only milk production in the months of March through December can be covered).
3. The maximum amount of milk production that can be covered per farm in any given Crop Insurance year (July 1 through June 30) is 240,000 cwt.
4. There is a federal premium subsidy on policies that insure multiple months during an insurance period. The subsidy varies from 18% to 50% depending on the deductible chosen. The deductible can vary from $0 to $2 at $.10 increments.
5. The LGM policy does not insure against the death or loss of dairy cattle or unexpected decline in milk production.

LGM- Dairy uses the Chicago Board prices to calculate the expected and actual margins. Class III milk futures and corn and soybean meal futures are the commodities considered. There are ranges in the volume (pounds) of corn and soybean meal used to produce a cwt of milk. The default values are ½ bushel of corn (26 pounds), and 4 pounds of bean meal to produce a cwt of milk. A dairy producer can use his actual values of feed used, if he so chooses, but ultimately it makes little difference.

A milk producer can choose which months within the coverage period, as well as how much milk per month, he wishes to protect. The months do not need to be consecutive nor does the amount of milk per month need to be the same. The LGM policy provides flexibility in managing each individual risk situation. Likewise, a dairyman can “stack policies,” provided he does not insure more milk than he produces in any one month. Again, this allows for tailoring a policy to meet unique risk scenarios.

A claim is triggered when the Actual Total Gross margin (sum of all months with covered milk) is less than the Expected Total Gross Margin. The price at which the milk is sold does not affect the loss payment. An insured is notified directly that he may have a claim if the values from the Chicago board indicate there was a deficit. At which time the insured must provide documentation that he indeed shipped at least 75% of the milk protected by the LGM policy.