November 10, 2017

Opt Out of MPP/Opt In to LGM-DAIRY!

 |  By: Ron Mortensen

Two big points to consider as far as dairy risk management is concerned:

  1. You can opt out of the government MPP
  2. You can use LGM-Dairy to give you better protection for milk produced in 2018 and beyond.  Keep reading to learn about LGM-Dairy and its advantages.

The ability to opt out of MPP a year early gives you the opportunity to use LGM-Dairy as a risk management tool for milk produced in 2018 and beyond.  No forms are required--you simply do not sign up for 2018 MPP.  Check with your local FSA office for details.  

For dairymen who opt out, the first time you can purchase an LGM-Dairy policy is Friday, November 17, 2017.  LGM-Dairy is sold the last business Friday of each month. For example, the next dates will be December 29, 2017 and January 26, 2018.

In the last few years, MPP showed it only covered extremely catastrophic price events.  LGM-Dairy is a more flexible product and provides more protection.  Our agency compared LGM-Dairy to MPP for the period January, 2015 to August, 2017.  The research shows LGM-Dairy had a $75 per cow gain versus losses in MPP.  $75 per cow is a lot of money.  That makes LGM-Dairy worth investigating and understanding.

The research compared $8.00 MPP, $6.50 MPP and LGM-Dairy.  The LGM coverage was purchased six months in advance with a $1.00 deductible.  The coverage was for 100 percent of a dairy’s milk, which was 10,000 cwt per month.  The lowest allowed amount of feed was chosen. 

The MPP covered 9,000 cwt because that program only allows 90% coverage.  Any MPP payouts were reduced by the government sequester of 6.8-7.3%.  Why not evaluate $4.00 MPP?  That level of coverage has no per cwt cost to a dairyman and has never had a payout. 

Data Sources: www.DairyMarkets.org, University of Wisconsin LGM Analyzer http://future.aae.wisc.edu/lgm_analyzer/

 

MPP-LGM-Dairy

 

Additional research shows using an average amount of feed produced the same net results.  Premiums were a little larger, but the average payout was larger by virtually the same amount.  If the milk production covered was 10 or 11 months out (versus 6 months), the average premium was 9 cents more and the average payout was 16 cents more.  That’s a 7 cent/cwt net improvement.

While LGM-Dairy has more choices than MPP, it is not necessarily more complicated.  There are some decisions which probably can be made once, with our help.  For example, we can agree on the amount of corn and soybean meal coverage that is appropriate for your operation.  We can also agree on the deductible you are most likely to use. 

It’s a simple application, with only one signature required.  Then you are ready to go and can make the final decision on or before the sales date. You must purchase coverage for at least two months to receive a subsidized premium.  You just need to determine an amount of milk to cover and what months you want to cover. 

LGM-Dairy Details 

If you have been enrolled in MPP, or simply need a little refresher, here are the basics of LGM-Dairy.  The product became available in 2008 and was further refined in 2010.  The changes in 2010 added subsidies to reduce premiums and moved premium payments to the end of the coverage period.

LGM-Dairy:

  1. Manages the risk of falling milk prices and rising feed costs. 
  2. Guarantees against income loss due to market events.
  3. Is federally back by RMA/USDA which underwrites and manages policies just like other crop insurance policies.
  4. Can insure up to 240,000 cwt per crop year.
  5. Has deductibles ranging from $0.00 to $2.00/cwt. 
  6. Has subsidy rates ranging from 18% to 50%.
  7. Uses customizable feed amounts to match your operation.  MPP uses a fixed amount of feed.
  8. Uses milk and feed prices based on CME Class III milk futures, CBOT corn futures and CBOT soybean meal futures.  MPP uses alfalfa prices in its calculations. 
  9. Is offered 12 times a year. 
  10. Can cover 2 to 10 months of milk production. The amount of milk covered can vary month to month.  Coverage can be purchased on any portion of your milk production.   
  11. Has an RMA subsidy limit of $20 million for all livestock products.   
  12. Has no transaction or commission costs paid by dairymen. 

 

Ron Mortensen is principal of Dairy Gross Margin, LLC, an agency that specializes in LGM-Dairy products, and owner of Advantage Agricultural Strategies, Ltd., a commodity trading advisor. 
ron@dairygrossmargin.com   www.dairygrossmargin.com 

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