Questions – and likely months – remain before dairy farmers can develop long-term milk marketing plans using one of two potential income margin protection plans as risk management tools.
Dairy farmers already have access to the USDA Risk Management Agency’s Livestock Gross Margin for Dairy (LGM-Dairy) program. On the other hand, final rules and a start date for the 2014 Farm Bill's Margin Protection Program (MPP) are yet to be determined.
It's also unclear whether there will be a transition period allowing farmers to switch from LGM-Dairy to MPP. Purchasing LGM-Dairy for a full 10-month period during the upcoming sales period (covering June 2015-March 2015) might make a farmer ineligible to participate in MPP. Under Farm Bill language, a farmer may not participate in both.
Adding to the potential confusion, the programs determine insurable income margins using different factors. LGM-Dairy uses closing Class III milk futures prices and futures prices for corn and soybean meal. Under the rules outlined in the Farm Bill, MPP will use USDA’s monthly reported all-milk price, as well as national average prices paid for corn, soybean meal and alfalfa hay.
While average monthly feed price calculations will ultimately be the same, the USDA all-milk price has averaged $1.50/cwt. more than the Class III price for comparable months since 2000. Therefore, an $8/cwt. margin under LGM-Dairy would equate to a $9.50/cwt. margin under MPP.
To help compare the two coverages, Alan Zepp, Risk Management Program coordinator with Pennsylvania’s Center for Dairy Excellence, has adjusted how LGM-Dairy margins are estimated to align with MPP. Zepp, who conducts monthly “Protecting Your Profits” conference calls to address risk management and milk marketing, reviewed the two programs in the latest call, April 23.
The next LGM-Dairy sales period will begin Friday afternoon, April 25, according to Zepp. LGM-Dairy will be offered for sale by crop insurance agents, with producers eligible to purchase margin insurance for a 10-month period (June 2014-March 2015), or any combination of months during that period.
The current insurable margin average for the entire 10-month period is $8.07/cwt. Due to declining milk prices, the insurable margin under LGM-Dairy is down about 90¢/cwt. from a month ago, but still $2.44 above the three-year actual average for the period, and $2.87 above the actual five-year average.
The premium for a $0 deductible LGM-Dairy policy to insure a margin of $8.07/cwt. is estimated at 84¢/cwt. A $1 deductible LGM-Dairy policy (covering a $7.07 margin) would cost an estimated 30¢/cwt.
As noted previously, the $8.07 LGM-Dairy margin correlates to a MPP margin of $9.57/cwt. However, the maximum insurable margin under MPP is $8.00/cwt. Farmers marketing less than 4 million lbs. of milk could cover the $8/cwt. margin at an estimated cost of 47.5¢/cwt. under MPP, but those marketing more than 4 million lbs. of milk would pay $1.36/cwt. to cover the $8 margin.
Zepp noted the current April 2014 Class III futures price is $24.23/cwt., nearly $10/cwt. higher than the five-year April average Class III price of $14.77/cwt. Margins aren't likely to remain this large.
Under current conditions, LGM-Dairy would provide higher margin protection levels than would be available under the MPP. However, if milk prices crash or feed prices skyrocket for extended periods of time, shrinking income margins could prove MPP more beneficial.
USDA is required to develop MPP rules by September 2014.
“Protecting Your Profits” information and a recorded podcast are posted at http://centerfordairyexcellence.org/protecting-your-profits/. The website also adjusts LGM-Dairy estimated margins weekly, based on updated futures prices.
Zepp’s next call/webinar will be May 21, providing information for the May 23-24 LGM-Dairy sales period and any updates on MPP. For further information, producers can contact him at firstname.lastname@example.org or phone 717-346-0849.