Dairy farmers can insure against low income over feed margins with an insurance product, Livestock Gross Margin (LGM) insurance, offered through crop insurance agents and underwritten by the USDA Risk Management Agency.
Structuring this product to provide the best level of protection against low margins involves a number of complexities such as the deductible to select and timing of coverage. For LGM to be useful, dairy producers must answer the question, “How do I tailor this product to provide the best protection for my insurance dollar?” New research from AEDE Associate Professor Cameron Thraen and AEDE Ph.D. student John Newton provides information to help farmers answer this important question.
According to the researchers, dairy producers who are anticipating purchasing LGM insurance should not purchase insurance for close-in months as it offers little margin protection in the event of low milk prices and high feed prices. Dairy producers may be tempted to buy the near-term insurance due to its lower cost, however, according to the researchers, this would be a mistake. Their research demonstrates that the best strategy is to buy the more expensive LGM insurance to cover production at least 9 months in advance, as this provides the best possible protection against low margins.
Thraen and Newton’s research, which was conducted with team members Marin Bozic, Assistant Professor of Dairy Foods Marketing Economics at the University of Minnesota, and Brian Gould, Professor of Agricultural and Applied Economics at the University of Wisconsin-Madison, has been published in the December 2012 edition of the Journal of Dairy Science in the article “Mean-reversion in income over feed cost margins: Evidence and implications for managing margin risk by US dairy producers.”
These findings are related to research originally presented by the research team at the 19th Annual National Workshop for Dairy Economists and Policy Analysts held on May 10 and 11, 2012 in Salt Lake City, Utah. An earlier story related to Thraen and Newton’s research on LGM insurance, which remains a controversial topic of conversation in the dairy world and has fueled much debate related to the Farm Bill, can be found here.
This article was originally published on October 12, 2012 with an update made available on November 21, 2012.