LGM-Dairy Update

Below is the second report from a dairy farmer using Livestock Gross Margin insurance (LGM-Dairy):

LGM-Dairy Blog Update

It has been awhile since I last wrote, but I thought I would write an update with our latest.

I think since I last wrote, LGM-Dairy has picked up a lot of interest and awareness. I know it was a topic of conversation with my husband’s family at Thanksgiving. His cousin was thinking of signing up for it and found out that there was only two contracts in the whole state that had been signed up till then – you guessed it, ours!

We shared our strategy with him – basically to maintain some sort of coverage at all times, or for however long we can. But really, we’re just testing it all out! We are using the default feed rations and trying out 100 cwts per month of coverage.

We should find out what happens for the December actual margin in the next few days. We first signed up in October, so December is our first month of coverage.

We also signed up in November for January margin coverage. We did the same thing that we did the previous month. However, we did change things up for the December sign-ups. A bunch of changes have been made and put into place for the program starting with applications completed in December.

• You no longer pay the premium up front, but rather at the end of the premium. Boy, does that take a hurdle out of signing up! For our low level of coverage- 100 cwts - the premium was not too bad for one month. But if we wanted to consider signing up more than one month, ten for example, that means we would have had to pay ten times what we were!
• There is a subsidy to go against the premium now, but you have to sign up for a minimum of two months. So, we signed up 100 cwts for two months – February and March. In the future I think we may look to sign up for more consecutive months.
• There are also deductibles that you can take off the top to help with your premium if you are signing up a lot of margin coverage. With our 25 cows, 100 cwts actually ends up being 22% of our total monthly milk production. We may look to increase that somehow – whether its overlap coverage so at any given time 44% of our margin and/or to simply increase the cwts of coverage.>

Another consideration we may make at some point is to figure out how our feed ration compares to the default and if it would advantageous to convert the energy in our ration and use our own.

I’m excited that the program is catching on. No doubt volatility is here to stay – even if we do reform milk pricing in the U.S. A paper that was put out by Mark Stephensen and Chuck Nicholson that analyzed the different policy proposals showed different levels of impact on a future projected price. One thing was true of all the proposals, however, while volatility may have been lessened, it was not eliminated.

There are tools out there already existing like LGM-Dairy and there are more to be created I’m sure to help alleviate this risk. I don’t want to wait for reform that may or may not happen. We’re taking whatever steps right now to try to manage the swings better. Someone once said, “If it is to be, it is up to me.”

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Many thanks to our anonymous farmer for sharing this experience with us!

See also:
Testing LGM-Dairy (the first report in this series)
LGM-Dairy Calculations (online LGM Analyzer)

Anyone with questions may post a comment on any of these blog posts. You may also directly e-mail our insurance agent Shantel Thomas or me.

UPDATE 1/03/11: Shantel had a baby boy this morning! Both mother and son are doing well. Until Shantel returns from maternity leave, Yankee's contact for crop insurance and LGM-Dairy insurance is Jeremy Forrett of Crop Growers. Anyone with questions can e-mail Jeremy or me.

LGM-Dairy Calculations

We recently started following the experience of a dairy farmer using Livestock Gross Margin (LGM-Dairy) contracts. Click here for the first post in this series.

Let's see if we can duplicate these numbers from that post: "Our premium is $40 for the month and we are insuring $1,468 gross margin." Recall that the example in that post was to insure 100 cwt with no deductible. The contract was entered into in October 2010, and one month was insured - December 2010.

Prof. Brian W. Gould of the Department of Agricultural and Applied Economics at the University of Wisconsin-Madison has helpfully created an online LGM Analyzer:

http://future.aae.wisc.edu/lgm_analyzer_new/

Open the LGM Analyzer at the link above in a new window and follow these steps:

• Select "Premium Estimator" tab
• Change the insurance contract month to 2010 October
• Change the deductible to $0.0
• Select "Default" for feed values

In the table:

• Uncheck the box in the header that says "Coverage Month"
• Check the box in that column for "Dec 2010"
• On the row for "Dec 2010" enter 100 for Milk Qty.
• On the same row, the column for "% covered" should autofill to 100

The three columns to the right should now show the insured gross margin: $11.06/cwt or $1,106 total. So why does the post say $1,468? That is (approximately) the "Milk Revenue" in the third column. I get $1,463.

Now scroll down and click the "Calculate LGM Premium" button. You will see that the premium is $0.40/cwt or $40 total. Voila!

Testing LGM-Dairy

Livestock Gross Margin insurance for dairy farmers (LGM-Dairy) has been available since 2008, but there has been little interest in it until recently. In October we worked with a dairy farmer who wanted to try a small contract—just to see how it worked, with real numbers. The farmer agreed to anonymously write about their experience and let us discuss it here on the blog.

We are pleased and excited to follow this farmer's experience. We hope this will be an educational experience for the dairy community. If you have questions as we go along, please feel free to post a comment. You may also directly e-mail our insurance agent Shantel Thomas or me.

Here is the farmer's first report:

Testing LGM-Dairy… Protecting Against the Squeeze

I’m a numbers person. My fiancé is not. However, we are both dairy farmers. As a numbers person who spends a lot of time analyzing businesses, I know that one of the biggest drivers of profitability is driving gross sales. What makes up gross sales? Volume of production and price. As dairy farmers, while we determine how much milk we sell simply by how many cows we milk and how productive we get them, we have little control over the price that we are paid. Unless you are retailing your own product, this is one of the most frustrating things about the dairy farming business.

Up until a year ago I just raised heifers so I have only been watching what has been happening with various price risk management tools, (wishing I could actually use them). There are several available now, compared to a few years back. These choices are important as it seemed like the first few options that were out there did not quite fit our farm – 25 cows milking. Many tools seem to fit various larger farms of different scale – 150, 500 and 1,000-cow plus.

I first learned about LGM-Dairy about two years ago and it was very confusing. Monitoring its progress though, I did hear of a few farms that used it and who had experienced good results – a sufficient payout. However, there were still many drawbacks. It seemed to me that this product needed more testing.

In a recent newsletter about LGM-Dairy that I received, the author threw out the idea to test the program yourself with 100 hundredweights. My immediate thought was: how much would that cost? I did a little digging and found that the premiums range of course, depending on what you choose for a deductible but generally from $0.65 per cwt. downward. Well, shoot, that makes it only about $65 to try it out.

I shared what I learned with my fiancé and we decided to dig a little deeper. Couldn’t hurt! LGM-Dairy uses corn and soybean meal prices along with Class III milk prices in its gross margin equation. Well, we don’t grow corn on our farm and feed grass-based silage. Nothing against corn, it just does not like to grow where we are, though we are hopeful to try again sometime in the future. I didn’t know how our grass-based ration would work with LGM-Dairy. That, combined with a few more questions including how to sign up, led me to find a crop insurance agent. We found Shantel Thomas who works for Crop Growers, LLP at the Yankee Farm Credit office.

Shantel was able to answer our questions and explain that we could either convert our own ration or use a default ration to determine the gross margin we would be insuring. We chose the default because quite frankly, it was the easiest. Essentially, we would be insuring a national gross margin, not necessarily what we have on our farm. I think the drawback to this is that if we achieve a better gross margin ourselves than the national average in a lower feed cost, then we are not insuring as much margin as we could. But, hey, it’s a place to start.

So, that’s what we are doing: testing out the program for one month – December 2010, insuring 100 hundredweights, no deductible, for $0.40 per cwt. and using the default feed ration. We faxed over our application and a copy of the check to Shantel and put originals in the mail during the short sign-up window which is the last business Friday and Saturday of October from 4:30 pm Friday to 9:00 pm Saturday. Our premium is $40 for the month and we are insuring $1,468 gross margin. Our expectations are not that we will get a higher price in the milk check, but rather that we are protecting ourselves against higher feed costs and a lower milk price that may actually occur in December.

We plan to do the same thing at the end of November to cover January margin. In the future, we would consider insuring more hundredweights and potentially for a longer period of time. That newsletter I mentioned earlier also explained some recent changes that are coming, namely subsidies and the timing of premium payment. Currently you have to pay the premium at the beginning of the policy and starting with contracts made in December, you’ll pay at the end. Seems to make more sense to me, matching closer to when you actually get paid for your milk.

We are happy to share our experience with other dairy farmers. It seems that as an industry, we may be on the cusp of some changes in the way we market and get paid for our milk in this country. However, if changes are made, it does not look like they will happen very quickly – the 2012 Farm Bill maybe, but there is no guarantee the bill would actually pass in 2012 or even 2013 and then any new program would need funding to be worked out anyway. We would rather try something that has the potential to help now than wait on anyone else any longer.