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DairyProfit Update for Aug. 28, 2012

LGM-Dairy: Opportunity worth the ‘bother’

Last Friday's announcement that USDA’s Risk Management Agency (RMA) would offer a Livestock Gross Margin-Dairy (LGM-Dairy) insurance policy sales period on Aug. 31 “came out of nowhere,” Alan Zepp, risk management program coordinator with Pennsylvania’s Center for Dairy Excellence, said in a conference call, Aug. 28. And, the initial reaction from insurance agents and Zepp himself was, “why bother?”

However, upon further reflection, Zepp estimated producers would pay about 81¢/cwt. for a “zero deductible” LGM-Dairy margin insurance policy, locking in a margin of more than $14/cwt. from October 2012 through July 2013. A “$1 deductible” policy would cost 28¢/cwt. In contrast, the same producer would pay $1.83/cwt. for put and call options for Class III milk on the Chicago Mercantile Exchange (CME). 

LGM-Dairy allows a producer to protect against the loss of gross margin (market value of milk minus feed costs). The policy uses futures prices for corn, soybean meal and milk to determine the expected gross margin and the actual gross margin. USDA’s RMA is making $2.5 million in underwriting capacity available for the Aug. 31 sales period. Based on previous underwriting capacity and coverage, that will insure about 7.735 million hundredweights of milk, or the annual milk production equivalent from 38,676 cows (averaging 20,000 lbs. of milk per year). 

Zepp and RMA anticipate the Aug. 31 LGM-Dairy sales period will be very short, likely exhausting limited funding within 5-10 minutes. To read more, click here


MARKETS: Butter jumps above barrels; Class III futures show little change

Today's market closing prices:

Butter: up 1.75¢, to $1.82/lb.

Cheddar blocks: unchanged, at $1.8525/lb.

Cheddar barrels: down 0.25¢, to $1.80/lb.

Grade A nonfat dry milk: unchanged, at $1.6650/lb.

Extra Grade nonfat dry milk: unchanged, at $1.6250/lb.

Class III milk: steady to mixed in a narrow range through August 2013. Based on current CME closing prices, the average for August-December 2012 is $19.40/cwt.; the full year 2012 average is $17.42/cwt.; and the 2013 average is $18.61/cwt.


Corn lower, but soybeans, meal futures higher

Corn: -5¢ through July 2013. The September-December 2012 average is $7.92/bu.; 2013 average is $7.39/bu.

Soybeans: +3¢ to +13¢ through September 2013. The September-November 2012 average is $17.27/bu.; 2013 average is $15.21/bu.

Soybean meal: +$2.40 to +$4.40/ton through September 2013. The September-December 2012 average is $527.30/ton; 2013 average is $426.50/ton.


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