What is Livestock Gross Margin (LGM) for Dairy Cattle?
The Livestock Gross Margin Insurance Plan for Dairy Cattle (LGM-Dairy) provides protection when feed costs rise or milk prices drop and can be tailored to any size farm. Gross margin is the market value of milk minus feed costs. LGM-Dairy uses futures prices for corn, soybean meal, and milk to determine the expected gross margin and the actual gross margin. LGM-Dairy is similar to buying both a call option to limit higher feed costs and a put option to set a floor on milk prices.
Only milk sold for commercial or private sale and primarily intended for final human consumption from dairy cattle fed in the states listed below is eligible for coverage. There is no minimum or maximum number of hundredweights you can insure.
Prices for LGM-Dairy are based on simple averages of Chicago Mercantile Exchange Group futures contract daily settlement prices, and are not based on the prices you receive at the market.
A premium subsidy is available for those policies that insure multiple months during the insurance period. The subsidy amount is determined by a dollar deductible the you choose (ranges from $0—$2 in $0.10 increments). If you choose a $0 deductible you receive a lower premium subsidy (18 percent) and if you choose the highest deductible of $2 you receive a higher premium subsidy (50 percent). The premium is due at the end of the coverage period. LGM premiums depend on your marketing plan, coverage you choose, deductible level, and futures and price volatility.
LGM-Dairy is available to any producer who owns dairy cattle in the 48 contiguous states.
2018 Farm Bill provisions allow for dairy operation to participate in both LGM-Dairy and Farm Service Agency’s Dairy Margin Coverage (DMC) program.
Causes of Loss
LGM-Dairy covers the difference between the gross margin guarantee and the actual gross margin. LGM-Dairy does not insure against:
- Dairy cattle death;
- Unexpected decreases in milk production;
- Unexpected increases in feed use;
- Anticipated or multiple-year declines in milk prices; or
- Anticipated or multiple-year increases in feed costs.
Buying a Policy
You can sign up for LGM-Dairy 12 times each year and insure all of the milk production that you expect to market over a rolling 11-month insurance period. LGM-Dairy is sold on the last business Friday of each month. The sales period begins as soon as the Risk Management Agency (RMA) reviews the data submitted by the developer after the Chicago Mercantile Exchange Group markets close on the last day of the price discovery period. The sales period ends at 8:00 p.m. Central Standard Time the following day. Your premium payment is due at the end of the insurance period. If expected milk and feed prices are not available on the RMA website, LGM-Dairy will not be offered for sale for the insurance period.
The insurance period contains the 11 months following the sales closing date. For example, the insurance period for the January 29 sales closing date contains the months of February through December. Coverage begins the second month of the insurance period, so the coverage period for this example is March through December.
To enroll, you must sign up on the last business Friday of the month. You must also submit an application with a target marketings report for the milk and corn and soybean meal equivalents. You may also choose to use the default values for corn and soybean meal equivalents.
The indemnity at the end of the 11-month insurance period is the difference, if positive, between the gross margin guarantee and the actual gross margin. If the actual gross margin is less than the expected gross margin (minus the deductible) for the insurance period, an indemnity may be payable.
Actual Marketings – The total amount of milk you sell each month of the insurance period for which there is a proof of sale. Actual marketings are used to verify ownership of milk and determine approved target marketings.
Deductible – The portion of the expected gross margin that you choose not to insure. Allowable deductible amounts range from $0 to $2 per hundredweight, in $0.10 increments. The deductible equals the selected hundredweight deductible multiplied by the sum of target marketings across all months of the insurance period.
Gross Margin Guarantee – The gross margin guarantee for an insurance period is the expected total gross margin for an insurance period minus the deductible.
Loss of Gross Margin – Market value of milk minus feed costs.
Marketing Report – A report you submit on the insurance company’s form showing actual, monthly marketings of milk insured under this policy. The marketing report must be accompanied by copies of sales receipts that provide records of the actual marketings shown on the marketing report.
Target Marketings – Your determination of the number of hundredweight of milk insured each month during the insurance period. Only the hundredweight of milk in which you have a share can be reported.
Target Marketings Report – A report that you submit on the insurance company’s form showing the target marketings for each month.
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Daily LRP Coverage Prices, Rates, and Actual Ending Values:
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Not all coverages or products may be available in all jurisdictions. The description of coverage in these pages is for informational purposes only. Actual coverages will vary based on the terms and conditions of the policy issued. The information described herein does not amend, or otherwise affect, the terms and conditions of any crop insurance policy issued by ProAg or any of its subsidiaries.