Risk management: Is LGM-Dairy insurance the right tool for your business?

By Josh Newton, crop insurance team leader, Compeer Financial

The centerpiece of the 2014 Farm Bill was the new Dairy Margin Protection Program (MPP). Because the process at the time appeared to be simple, yet effective, a large number of dairy farmers decided to enroll in the program.

However, once enrolled, the opportunity to participate in the federally subsidized LGM-Dairy program was eliminated. If you opted not to participate in the MPP program, we’ve put together a little refresher on the LGM-Dairy program, which may be an addition to your farm’s risk management plan.

The LGM-Dairy program provides protection when milk prices fall or when feed prices rise. The purpose of the program is to protect our Income Over Feed Cost (IOFC) margin, which is the difference between expected milk prices and expected feed costs, less any deductible, which can range from $0-$2.00/CWT. Class III milk futures price, corn futures price and soybean meal futures price, traded on the Chicago Mercantile Exchange determine the margins. Here are some of the features that may make this option a good fit for your business:

Customizable to fit your farm

• Percentage of milk covered can vary from month to month.
• Feed ration quantities can be adjusted to match your farm. 
• Available for herds of all sizes, allowing for coverage up to 24 million pounds per marketing year.

Convenient

• You can add coverage up to 12 times per year as long as the funding is available and the maximum number of pounds of milk has not been reached.
• You pick which months to insure milk within the available 10-month policy period.

Responsive

• Margins are based on current market prices allowing you to lock in higher margin levels when they are advantageous to your farm.
• You can increase the amount of milk covered in future months to accommodate production growth or expansion of your herd.

Affordable

• Contrary to the MPP program, coverage over 4 million pounds doesn’t result in a higher premium rate.
• Federally subsidized at ranges from 18 to 50 percent, depending on the deductible level selected.
• Premiums are due after the 10-month policy period has ended.

Prior to electing LGM-Dairy coverage, it’s important to take time to evaluate and understand the key metrics of your own business. For instance, knowing your IOFC and your current balance sheet numbers can help you predict the impact declining margins could have on your farm. This will help you decide how much coverage, and what coverage level, is right for you.

If you need assistance gaining a handle on these numbers, work with your lender or another trusted adviser. That’s the first step in exploring how the LGM-Dairy product might fit into your risk management plan.

For more insights from Josh and other Compeer experts, please check out the articles and blogs on compeer.com/education.