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LGM-Dairy: Livestock Gross Margin-Dairy
LGM-Dairy is a valuable and flexible insurance product that provides protection against the loss of gross margin (market value of milk minus feed costs) on the milk produced from dairy cattle. Any agricultural producer in the lower 48 states is eligible for the LGM-Dairy insurance program. It is based on a gross margin for a defined future period of time, established when the policy is written, (Expected Gross Margin). When the future period of time comes current, then the actual Gross Margin is calculated. If the actual is less than the expected, an indemnity is due the policy holder.
LGM is flexible from the standpoint that a dairy producer can choose the months for which he wants coverage on his milk production. He can also choose how much of his milk he would like to protect. This is in direct contrast to the Federal USDA Margin Protection Program, MPP, which requires a decision for the entire calendar year as to amount of milk covered, and the dollar margin protected.
Some of the features of the program that a producer needs to be aware of, and must take into consideration when evaluating if LGM fits his diary operation, are as follows:
- There are 12 insurance periods throughout the year, each defined by a monthly sales period. The last business Friday of the month, starting at 5:30 pm EST and ending the next day, Saturday, 9:00 pm EST.
- Each policy period is 11 months. In any given policy period, a producer can cover 10 months of milk production. (Ex. January sales month covers February through December. No February milk can be covered. Only milk production in the months of March through December can be covered).
- The maximum amount of milk production that can be covered per farm in any given Crop Insurance year (July 1 through June 30) is 240,000 cwt.
- There is a federal premium subsidy on policies that insure multiple months during an insurance period. The subsidy varies from 18% to 50% depending on the deductible chosen. The deductible can vary from $0 to $2 at $.10 increments.
- The LGM policy does not insure against the death or loss of dairy cattle or unexpected decline in milk production.
LGM- Dairy uses the Chicago Board prices to calculate the expected and actual margins. Class III milk futures and corn and soybean meal futures are the commodities considered. There are ranges in the volume (pounds) of corn and soybean meal used to produce a cwt of milk. The default values are ½ bushel of corn (26 pounds), and 4 pounds of bean meal to produce a cwt of milk. A dairy producer can use his actual values of feed used, if he so chooses, but ultimately it makes little difference.
A milk producer can choose which months within the coverage period, as well as how much milk per month, he wishes to protect. The months do not need to be consecutive nor does the amount of milk per month need to be the same. The LGM policy provides flexibility in managing each individual risk situation. Likewise, a dairyman can “stack policies,” provided he does not insure more milk than he produces in any one month. Again, this allows for tailoring a policy to meet unique risk scenarios.
A claim is triggered when the Actual Total Gross margin (sum of all months with covered milk) is less than the Expected Total Gross Margin. The price at which the milk is sold does not affect the loss payment. An insured is notified directly that he may have a claim if the values from the Chicago board indicate there was a deficit. At which time the insured must provide documentation that he indeed shipped at least 75% of the milk protected by the LGM policy.
Frequently Asked Questions
What are the advantages and disadvantages of LGM versus MPP?
LGM can give you, the producer, more flexibility as to the months you wish to cover and the amount of milk per month. You can tailor your policy to meet your individual farm needs. It also responds faster in paying claims. The MPP product is very heavily subsidized and therefore may cost less. However, it is not as flexible and it does settle claims as rapidly as LGM.
How fast is a claim paid?
At the end of the coverage period, as soon as the prices are posted on the Chicago Board, the Insurance Company will send notice directly to the insured that there is a possible claim. (This means there is a payment to be made, as long as the dairyman has actually shipped the milk.) This notice is mailed within 10 to 15 days from when all prices are posted from the Chicago Board. The Insured has 15 days to return verification of milk shipped. The claim check follows in 7 to 10 days.
Why would a dairyman choose a feed value other than the default values?
If a dairyman is purchasing a large portion of his feed and he feels that the price of feed has a good chance of being higher than expected, choosing higher feed values will cause the margin difference to be impacted in his favor. In other words, higher feed values make the equation more sensitive to feed movement, while lower feed values make it more sensitive to milk movement.
Am I penalized if I do not ship as much milk as I contracted on the policy?
The policy wording states that the dairyman must ship at least 75% of the amount of milk stated on the policy. If he does not ship the 75% factor, then his payment is pro-rated based on the actual milk that was shipped. There is no refund of any premium.
How can I control my premium cost?
There is a federal premium subsidy that applies to policies which insure multiple months during the insurance period. In addition, if the insured chooses a deductible between $0.10 and $1.10 per cwt, the subsidy increases (up to a maximum of 50%).