Available since 2008, Livestock Gross Margin for Dairy Cattle Insurance offers dairy farmers a way to help protect a defined level of income over feed cost. To do so, the federally re-insured insurance program requires users to make three critical decisions at the time of purchase: how much production will be covered, declared feed equivalents used to produce this milk and the level of gross margin not covered by the insurance (the deductible).

Researchers at the University of Wisconsin developed an optimization model to help producers choose the best strategy to incorporate this tool and help manage variability in net farm income. Not surprisingly, according to results published in the July Journal of Dairy Science, optimal contract designs vary with changes in income targets.

In addition, the model indicates that failing to design an optimal contract can have significant financial implications. For example, for a sample dairy that insures about half of its production, insurance premium cost could be as much as 80 percent lower for the optimal contract than for the non-optimal contract.