For larger dairy producers who didn’t enroll in the Margin Protection Program for Dairy (MPP-Dairy), the Livestock Gross Margin-Dairy (LGM-Dairy) program may be worth looking into as a risk management option for the latter half of 2018, according to Alan Zepp, risk management program manager at Pennsylvania's Center for Dairy Excellence (CDE).
LGM-Dairy policies are sold through crop insurance agents. The next LGM-Dairy sales period opens today (July 27); the August sales period is Aug. 30-31. Contact a crop insurance agency certified to offer LGM-Dairy policies.
Margin protection options
Zepp reviewed various risk management options during his monthly “Protecting Your Profits” conference call, July 26.
• At the time of the call, Class III futures for the remainder of 2018 averaged $15.62 per hundredweight (cwt), up from $15.29 per cwt a month ago. Class IV futures for the remainder of 2018 averaged $14.88 per cwt, up from $14.69 per cwt a month ago.
October 2018 CME Class III futures contracts settled at $16.12 per cwt on July 24. Because put options are traded in 25-cent increments, producers could choose an at-the-money put at either $16 or $16.25 per cwt. A $16 put would cost 47 cents; a $16.25 put would cost 60 cents. Reflecting similar risk protection to a $1 deductible LGM-Dairy policy, a $15.25 put would cost 20 cents. If purchasing a put option, there will also be a small charge to cover the difference in the bid-ask spread.
• As of late July, the LGM-Dairy insurable margin for the 10-month period (September 2018 through June 2019) averaged $7.14 per cwt. Cost for coverage for the entire period was estimated at 43 cents per cwt for a $0 deductible policy; 7 cents for a $1 deductible policy.
For those Tier II herds (above 5 million pounds of milk) who did not enroll in the 2018 MPP-Dairy program, the current $1 deductible LGM-Dairy policy would replicate $7.50 per cwt MPP-Dairy coverage. However, the LGM-Dairy cost would be 7 cents per cwt, compared to the MPP-Dairy Tier II premium cost of $1.06 per cwt.
• The current estimated MPP-Dairy margin for the remainder of 2018 is about $8.18 per cwt. Based on milk and feed futures prices as of July 24, the Program on Dairy Markets and Policy projects monthly MPP-Dairy margins will reach about $7.50 per cwt in June, but fall back below $7 per cwt in July.
Market fundamentals
Zepp’s overview of market fundamentals showed U.S. cow numbers have been stable, but milk production per cow continues to uptick slightly. June 2018 cull dairy cow slaughter was similar to a year ago, but above the historical average for the month.
Affecting domestic dairy product markets, consumer confidence remains strong.
Impacting exports, the U.S. dollar strengthened slightly but remains below the three-year average. U.S. dairy product prices remain competitive on the world market. As of early in the week, the Chicago Mercantile Exchange (CME) cash block cheddar price of $1.52 per pound was less than the latest Global Dairy Trade (GDT) auction price of $1.63 per pound and the European Union (EU) price of $1.78 per pound. CME butter was trading about $2.23 per pound, below the GDT average of $2.55 per pound and the price in Germany of $2.96 per pound. Finally, the CME nonfat dry milk powder was trading at about 79 cents per pound compared to the GDT average of 89 cents per pound, but higher than the German price of 70 cents per pound.
World milk production is increasing slightly, with most of the growth in the European Union.
Zepp’s next Protecting Your Profits call will be Aug. 22. All calls are recorded and archived. 
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Dave Natzke
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- Progressive Dairyman
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