---

Brian Gould from the University of Wisconsin Department of Ag and Applied Economics recently held a two-part Webinar to explain Livestock Gross Margin-Dairy.
"With the start of the new fiscal year, I thought it would be good to do some training about this program," he said.
With grain prices being higher than in the past, Gould said margin volatility for dairy producers is now a concern. LGM-Dairy can help create a larger margin.
The LGM-Dairy program works similarly to puts and calls, Gould said.
"It establishes an income over feed cost floor - not locking in a margin - allowing for opportunity for producers to take advantage of higher than anticipated milk price or lower than anticipated feed cost," he said.
The producer sets a floor price for milk and feed costs, and not a locked in price. Producers are guaranteed that floor price whether milk prices go too low or feed prices go too high.
Different than puts and calls, the premium for LGM-Dairy is not due until after the 11-month insurance period. Also unlike puts and calls with, LGM-Dairy there is no minimum size limit.
"This [LGM-Dairy] is a very appropriate instrument for smaller operations," Gould said.
However, because of funding, there is an upper limit of 240,000 cwt. over 10 months. Gould said this is about a 1,200-cow farm.
Being a flexible insurance program is a positive for LGM-Dairy.
"But with that flexibility comes an increased planning requirement because of the number of dimensions that determine the cost and performance of a contract," Gould said.
Gould said this is a pilot program regulated by the government with $20 million dollars allotted to the whole LGM program. In the 2010 and 2011 fiscal year, $16 million was allotted to LGM-Dairy while $7 million was allotted to LGM-Dairy in the 2011 and 2012 year.
The use of LGM-Dairy has grown in popularity over the recent years. In 2011 and 2012 there were 1,783 contracts sold compared to 45 in 2008 and 2009, 153 in 2009 and 2010, and 1,412 in 2010 and 2011; however, the use of LGM-Dairy is determined by the availability of federal funding.
"Producer demand clearly exceeds funding available. The utilization rate [by producers] is small because the funding is small. If we had an expansion of the funding, producer utilization would increase significantly," Gould said. "It's tough to get a contract because of the high demands for it."
One drawback to the program is its short sign-up window. Although LGM-Dairy is supposed to be available to purchase monthly, it is not uncommon for the funds to run out on the first day LGM-Dairy is available during the fiscal year.
"There is potential for increased funding in the new Farm Bill," Gould said.
However, it is being considered in the new Farm Bill that producers would not be able to use LGM-Dairy and Margin Insurance at the same time, Gould said.
When producers do have the chance for an LGM-contract, it's important to remember that LGM-Dairy is customizable and the number of months insured can vary from one to 10.
"These days, most people are doing 10 months because of limited funding," Gould said.
The purchase period starts at 4:30 p.m. CST on the last business Friday of the month and ends at 8 p.m. the next day.
It's also important for producers to work with an LGM-Dairy agent before contract day. Producers need to know their feed costs so they can determine what an acceptable floor price will be and determine an expected outcome.
For more information, visit Gould's LGM-Dairy Web site: http://future.aae.wis.edu/lgm_dairy.html
To join Gould's mailing list to receive additional information about LGM-Dairy, visit http://future.aae.wis.edu/lgm_dairy.html#5
Gould can be reached for additional questions at 608-263-3212 or [email protected].

[[In-content Ad]]

---