Livestock Gross Margin - Dairy
2014
! LGM-Dairy Update !
The real threat to the financial life of your dairy is a combination of milk price and feed prices that result in a deterioration of your gross margin and ultimately your farms Equity Ratio (Farm Net Worth divided by Total Assets) to a point below which it is not feasible to continue operations. Ask your ag lender or banker! How do you protect your Equity Ratio? Until recently the only option was to use a bundled option strategy. With this risk management tool you buy both PUT options on the Class 3 milk price and CALL options on the corn and soybean meal prices, paying option premiums and broker fees.Another strategy, one gaining more interest by milk producers every day, is to look into and purchase Livestock Gross Margin Insurance. This insurance product creates a customized bundled options product, custom fit to your milk production and feed use, providing protection against ruinous declines in gross margin and erosion of your Equity Ratio. You pay a premium which may be subsidized up to 50% of the total required insurance premium!
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Should you or your organization be interested in learning more about LGM or in organizing a workshop or presentation covering all aspects of LGM for dairy producers, please contact me to discuss your interest. (thraen.1@osu.edu)
Cameron Thraen, State Specialist Dairy Markets and Policy
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Papers by Cameron Thraen on LGM-Dairy Insurance
Livestock Gross Margin Insurance: An Introduction and Farm Example.
This paper explains the background on LGM-Dairy and takes you through a numerical example for a typical dairy farm.
Do I 'need' LGM-Dairy Insurance for my farm? A guide for milk producers.
This paper address the important question: Do I need to purchase gross margin insurance for my dairy operation as protection against financial catastrophe?
LGM Dairy Summary: Premium Dollars - Where do they come from and to whom do they go? (updated 11.19.2012)
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Click below to reach the USDA Risk Management Agency Risk Management Agency Livestock Gross Margin-Dairy
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Livestock Gross Margin Dairy Insurance Powerpoint Slide Set
Livestock Gross Margin Insurance for Dairy: An Introduction and Farm Example
Current LGM-Dairy Contract for an Ohio dairy farm
with 250 milk cows and 60#'s per day production.
Total Target Marketings (TTM) = 45,600 cwt's.
Target Marketings (TM) = 22,800 (50% of TTM)
Coverage = 10 months / deductible = 0.0 per cwt.
LGM-Dairy evaluation conducted: December 17, 2012
This chart depicts both the premium and the coverage for a dairy farm with fixed contract specifications. This data is generated each Monday during the year, beginning on February 23, 2011. The direction of movement is the important point to take from this chart. An upward trend in the Net Premium is indicative of an anticipated increase in the probability of a margin decline and an insurance payout. An upward trend in the Net GMG is indicative of an increase of the total risk exposure to the LGM underwriter, e.g., larger expected payout in the coming 10 months.
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Visit this site for more LGM-Dairy Information
Understanding Dairy Markets / University of Wisconsin Website for LGM
http://future.aae.wisc.edu/lgm_dairy.html#4
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