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Livestock Gross Margin Insurance: Another Safety Net For Dairymen

30 September 2014

University of Illinois

An Illinois economist has advised farmers getting to grips with the new Margin Protection Programme that the Livestock Gross Margin Insurance for Dairy Cattle also assists with risk.

Introduced in 2008, the Livestock Gross Margin Insurance for Dairy Cattle (LGM-Dairy) is an insurance product overseen by the USDA's Risk Management Agency offering protection against declines in average dairy income over feed cost margins.

Like crop insurance, LGM-Dairy is sold by private insurance agents and underwritten by the Federal Crop Insurance Corporation, writes John Newton, Department of Agricultural and Consumer Economics, University of Illinois.

Visit for a complete description of LGM-Dairy rules.

Because LGM-Dairy and MPP are USDA programmes, the 2014 farm bill allows dairy farmers to participate in MPP or LGM-Dairy, but they may not use both programmes simultaneously.

Given this one-or-the-other feature, considering the benefits of each risk management instrument is important before making a participation decision. The features of MPP are covered comprehensively at farmdoc daily (http://farmdocdaily.illinois. edu/2014/05/2014-farm-bill-mpp-dairy-dashboard.html).

LGM-Dairy is available for purchase each month and is a fully customizable market-based instrument offering protection only at prevailing market prices. MPP is available for purchase once per year and is a target index safety net program offering single or multiyear protection against declines in farm production margins.

Before deciding to purchase LGM-Dairy or MPP as a risk management tool, you first must review your dairy farm balance sheet to determine your farm-level risk exposure, how much margin variability your farm can withstand and how much of an equity reduction you can sustain on your dairy.

Both programs provide the opportunity for dairy farmers to limit downside risk. When determining the advantages of one program vs. another, you need to consider factors in addition to basis, such as price floors, indemnities and premium rates.

Table 1 (Page 3) identifies several notable contract design differences between the two safety net programs. You also should consider program availability, coverage duration, frequency of indemnity payments, the level of customization, and potential interplay between MPP and LGM-Dairy coverage availability.

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