Two years ago, after considering ways to protect their dairy against price loss, Jon and Julie Patterson decided to try the USDA’s Livestock Gross Margin Insurance program for dairy (LGM-Dairy).
That’s been a smart decision for the Auburn, New York, couple.
The Pattersons have received three indemnity payments from LGM-Dairy in 2016, well surpassing their premium costs and justifying the policy’s purpose of shielding their milking operation from downside risk.
“We’re happy with the results,” say the Pattersons, who milk 1,100 cows and crop 2,500 acres. “For us, LGM is a long-term insurance policy, like crop insurance. You hope you never use it. We know how LGM-Dairy works, we’re comfortable with our strategy, and we don’t have plans to change it at this time.”
The Pattersons’ success with LGM-Dairy highlights the need for dairy producers to take a closer look at this risk management program. You’ve heard a lot about the USDA’s Margin Protection Program (MPP), but it’s important you understand the true picture of what’s been paid out on the MPP versus LGM-Dairy. So far in 2016, LGM-Dairy has been the big winner because of bigger payouts.
In August, the USDA announced an $11.2 million payment to U.S. dairy producers enrolled in the 2016 MPP. The payments were the largest in the history of the two-year-old support program. On the surface, the payout sounds good, but let me point out what’s missing from those numbers.
The $11.2 million payment did not include the federal government’s 6.8 percent sequester deduction, so the actual amount is closer to $10.4 million. Just as important, the per-hundredweight (cwt) payments to MPP producers announced by the USDA did not include the premiums they paid.
Not only were LGM-Dairy payouts bigger, but premiums were smaller in some cases for the larger producers.
In the first half of 2016, MPP’s small producers (4 million pounds of milk production coverage) who paid a $6.50 coverage premium received a net return (after the premium cost) of just 14 cents per cwt. Large producers (24 million pounds) with MPP’s $8 coverage lost 2 cents per cwt (after premium).
An LGM-Dairy producer, however, with a $1 coverage deductible saw a net return after premium of $1.38 per cwt.
Key differences between LGM and MPP
LGM-Dairy, in place since 2008, protects producers against drops in average dairy income over feed cost margins. Coverage is available each month at prevailing market prices. The USDA’s Risk Management Agency oversees the program. LGM-Dairy policies are sold by private insurance agents and are underwritten by the Federal Crop Insurance Corporation.
MPP, also a USDA risk management tool, is offered only once a year. If you participate in LGM-Dairy, you can’t enroll in the MPP. As my colleague Marv Carlson stresses, it’s also important to remember that once you enroll in the MPP, you’re locked into it for the rest of the current farm bill.
LGM-Dairy and MPP are similar in their objectives of managing risk for dairy producers, but they differ in approach. For example, the premium for LGM-Dairy insurance is due only for the milk covered, and the premium payment is due at the end of the policy. A premium for a policy purchased in November 2016 would not be due until November 2017. With the MPP, you pay the premium by June 1.
Another key difference is the amount of feed in the calculations. MPP has a high fixed amount of corn, soybean meal and hay in its calculations. LGM’s feed component is variable, with the lowest amount of feed being very small. Hay is not included in LGM-Dairy.
The result is that MPP responds more to increases in feed prices, while LGM-Dairy, especially with low feed use, responds more to decreasing milk prices. In our calculations, we use the lowest amount of feed because most of our clients use low amounts of corn and soybean meal in their LGM-Dairy calculations.
LGM-Dairy sign-up advice
Dairy producers can purchase LGM-Dairy on the last business Friday of each month and insure two to 10 months of milk production. LGM-Dairy will be offered on Sept. 30, Oct. 28, Nov. 18, Dec. 30 and on into 2017. Policies are sold on a first-come, first-served basis.
The MPP sign-up deadline for 2017 enrollment was originally set for Sept. 30 but has been extended to Dec. 16, 2016.
With milk at or above $16 per cwt, producers should take a look at LGM-Dairy coverage. I suggest covering a portion of your production five to seven months out. This will:
- Establish a financial floor for all stakeholders
- Stabilize cash flow for the months covered
- Prevent income from being capped if prices rise
LGM-Dairy is designed to protect producers when feed costs rise or milk prices drop. For dairy producers like the Pattersons, LGM-Dairy is doing its job.
“We’re not trying to make money off of LGM-Dairy but just to protect our floor,” the couple says. “We’d rather have the insurance to manage our risk and avoid another experience like 2009. We’ve picked the strategy that works for us, and we’re staying with it.” 
Learn more about LGM-Dairy online at the Dairy Gross Margin LLC website or view a USDA-RMA factsheet. You can email Ron Mortensen or call him at (515) 570-5265. Email Marv Carlson or call him at (712) 240-8395.
PHOTO: Jon and Julie Patterson of New York elected to use LGM-Dairy to protect against dairy price loss. Photo courtesy of Dairy Gross Margin LLC.
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Ron Mortensen
- Dairy Gross Margin LLC
- Email Ron Mortensen
LGM-Dairy Pros:
- Performed better than MPP in 2016.
- Best match for farm feed risk coverage needs. You can choose actual feed input to match your own operation.
- Better value for the risk management dollar.
- Offered 12 times per year to select coverage options versus once and done, like MPP.
- Use when risk management protection is needed, not continuously. You don’t have to buy LGM every month.
- The premium payment is due at the end of the policy period, whereas MPP premium payments are front-loaded.
- Margin protection per cwt is normally less costly.
- There are no production/expansion limitations.
LGM-Dairy Cons:
- Coverage limited to 240,000 cwt per year.
- You can only insure margins offered by the market each month.
- Possibility that the subsidy may be depleted before crop year ends.
- Indemnity is calculated on weighted average of months covered.
MPP Pros:
- You only have to sign up once.
- Margins are calculated on a bi-monthly basis.
- 90 percent of historical milk produced is insurable.
- No production size limitation to participate.
- Margins are guaranteed to be available.
- Margins coverage breaks out by 50-cent increments between $4 and $8.
- Can decide on the percent coverage (25 percent to 90 percent in 5 percent increments).
- Less than 4 million pounds is highly subsidized.
MPP Cons:
- In today’s market, milk prices have to drop $6 per cwt to get to the $4 guarantee.
- You are locked into a fixed amount of feed to calculate the margin.
- You pay a premium to cover a margin on feed produced on your farm.
- You are locked into a production/expansion limitation for milk production.
- You pay at least a portion of the premium for MPP before June 1.
- You can’t participate in both MPP and LGM.
- Higher margin coverage is expensive.
- Premium-to-payoff ratio is low, especially at higher guarantee levels.
- Because of the high amount of feed in the margin, basis risk can be significant.
- Percent coverage decision made one time each year; in 2016, decision will be Dec. 16.
