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LGM-Dairy sales period is Nov. 30

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Despite frustrations over past performance, dairy producers should consider taking advantage of the Nov. 30 Livestock Gross Margin-Dairy (LGM-Dairy) sales period, according to Alan Zepp, Risk Management Program coordinator with Pennsylvania’s Center for Dairy Excellence. Hosting his monthly “Protecting Your Profits” conference call on Nov. 28, Zepp said current insurable margins remain well above historical averages.

As of Nov. 28, the expected insurable margin for the 10-month coverage period (January-October 2013) is about $14.08/cwt. The five-year average margin for the period is $12.32/cwt.; the 10-year average is $12.11/cwt.

 

Zepp estimated a $0 deductible policy covering the 10 months, using default feed values, would cost 69¢/cwt. For a $1 deductible policy (guaranteeing a margin of $13.08/cwt.) for January-October 2013 period, the cost of coverage would be about 21¢/cwt.

 

Compared to other risk management tools, LGM-Dairy costs are favorable. On Nov. 28, CME March corn was at $7.60/bushel, with a call costing about 45¢/bushel on a 5,000-bushel contract. March soybean meal contracts were at $425/ton, with a $430 call costing $16.40/ton. March Class III milk, at $18.53/cwt., had a put cost of 77¢/cwt. A put for May Class III milk, at $18.50/cwt., would cost $1.01/cwt.

 

During the October 2012 sales period, 31% of the U.S. milk insured by LGM-Dairy was in Wisconsin, followed by Minnesota (14%) and California (13%). Meanwhile, New York accounted for about 3% of the milk covered under the margin insurance policy, and Pennsylvania accounted for just 2%. Zepp attributed the small participation in the Northeast to disappointment over LGM-Dairy’s performance last year, when feed prices averaged much higher than the national average used to calculate estimated margins. 

 

“Producers in the East are understandably frustrated with LGM-Dairy’s lack of ability to represent their ‘real world’, but hopefully they do not overlook real opportunity to protect 2013’s potential profits,” Zepp said. “The margins are $1.67 higher than they were last year. Given the economic uncertainty around the world and in the dairy industry, dairymen around the country will see spending 69¢/cwt. to protect a margin that is $1.67 higher (15%) above the five-year average is a good deal. They're even more likely to spend 21¢/cwt. for a $1 deductible that's still 67¢ higher than the five-year average.”

 

Approximately $10 million remains of the $14.9 million in underwriting capacity allocated for LGM-Dairy for fiscal year 2013, according to Dr. Brian Gould, professor in the University of Wisconsin-Madison’s Department of Agricultural and Applied Economics. About one-third of the annual total was used on premium subsidies and administrative costs during an Oct. 26 sales period.

 

Gould’s LGM-Dairy Analyzer software system can be used for planning purposes (http://future.aae.wisc.edu/lgm_analyzer/), or contact him at bwgould@wisc.edu or phone 608-263-3212. For additional information, visit http://future.aae.wisc.edu/lgm_dairy.html.

 

Contact Zepp at Alan Zepp (azepp@centerfordairyexcellence.org) or phone 717-346-0849.

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