Source: Compeer Financial
With historically high milk prices over the past several months, it can be easy for dairy producers to shift their focus from managing milk price risk to other farm priorities. In reality, now is the ideal time to prepare for the likelihood that the markets will eventually trend lower. Dairy Revenue Protection (DRP) and Livestock Gross Margin (LGM) are two insurance programs that dairy producers can use to prepare. Both of these programs share three key features:
· A premium subsidy to significantly reduce the cost of the coverage, depending on coverage level or deductible selected
· The option to leave the upside open and not set a limit on the farm’s revenue potential if prices move higher
· Premium payments due after coverage ends with nothing due up front
DRP offers protection against a decline in quarterly milk revenue based on CME futures prices and a guaranteed coverage level of up to 95% for the five upcoming quarters. The protection is very customizable, giving producers the option to decide whether they want their coverage based on class or component pricing. You can select a protection factor from 1.0 to 1.5, which can increase your indemnity by up to 50% in the event of a loss. Using the 1.5 protection factor and focusing on the effective covered milk production (declared covered milk production times 1.5) is a strategy that allows more flexibility to add on coverage if prices rally after coverage is put in place.
LGM is a program that has been around longer than DRP, but has seen some recent changes. It has now moved from monthly to weekly sales, which is meant to encourage more use moving forward. LGM protects against a loss of gross margin using futures price for Class III milk, corn and soybean meal. The feed selection made by the producer is customizable and must fit between a given range for both corn and soybean meal. Producers can select the lowest allowable feed values to focus more on protecting a milk price or they can select higher feed values to protect a true milk vs. feed cost margin. You also need to select a deductible between 0 and $2.00 per hundredweight in 10 cent increments, which determines the premium subsidy level. Producers must take coverage in at least two months within the ten-month coverage period to receive the subsidy, but there only needs to be one hundredweight in a second month to meet this criteria. This allows producers to focus coverage on a single month with the ability to take out multiple sets of target marketings during the weekly sales period. LGM coverage is available every Thursday and can be taken up to eleven months out from the current date.
Producers can switch back and forth between DRP and LGM depending on which program is the best fit for them. However, you cannot have DRP and LGM coverage in place in the same quarter.
At Compeer Financial, we know how critical is it to provide our clients with tools to help make sound risk management decisions for their operation. Through the use of our exclusive DRP/LGM Analyzer tool, our clients can have the information they need to make informed coverage decisions in one place, including current premium quotes, price trends and historical data.