Ins and outs of Livestock Gross Margin insurance

There has been a lot of interest in the Livestock Gross Margin risk-management tool lately, says Rick Adams with Winton Ireland Strom &; Green.

The increased interest in LGM Dairy has generated a lot of questions from dairy producers. Adams shared information and advice at the Western United Dairymen meeting Wednesday in Visalia, Calif., on using this risk-management tool.

If you're unfamiliar with Livestock Gross Margin or LGM Dairy, it is a federally reinsured dairy insurance program that provides protection for loss of gross margin. The gross margin is what's left after subtracting your feed cost from your milk revenue. LGM Dairy pays the difference, if positive, between an expected gross margin guarantee and the actual gross margin.

Before using this tool, Adams says it's very important to understand what this product is and what this product isn't.

Unlike other risk-management tools, LGM Dairy is purchased from a crop insurance provider. This tool uses futures prices for corn, soybean meal and milk to determine the expected gross margin and the actual gross margin. "One of the biggest things to keep in mind is that prices received or paid by the producer are not used in this tool," notes Adams.

There are some recent revisions to the LGM Dairy program that are important to be aware of. The premium is subsidized from 18 percent to 50 percent, and is now due at the end of the contract period. The maximum deductible has increased to $2.00 per hundredweight, there is now a 24-hour purchase window and the feed equivalents have been updated.

Adams points out some advantages to LGM are that it protects your gross margin, bundles feed and milk, it is flexible and customizable (periods of coverage from one to 10 months and can be tailored for different size producers). It does not prevent the dairy producers from realizing the upside of the milk market and it is written out how to submit a claim and when the claim is paid, he adds.

He's quick to point out that there are some drawbacks with this program. The drawbacks include a very short sale period of 24 hours, which is the period that begins on the last business Friday of the month after validation of prices and rates and ends at 8 p.m. central time of the following day. Other drawbacks include no single dairy can cover more than 240,000 hundredweights of its milk marketing's in a policy year and a claim cannot be submitted until the insurance period is done.

When using LGM Dairy, it's something you want to do very selectively, says Adams. "It's not something you want to waste."

He does note that LGM Dairy is just one of the arrows in the quiver available to producers to manage risk.  But regardless of where you live or what size the operation is you should be looking at every risk-management tool you have available.

Two useful tools for learning more about LGM Dairy are the Understanding Dairy Markets Web site and the LGM Analyzer.

If you have an interest in using LGM Dairy as a risk-management tool, it is recommended that you sit down ahead of time with the LGM Analyzer tool to play with margins, deductibles and determine a strategy that is a fit for your operation, notes Adams.