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Gross margins for dairy —

By Staff | Jun 12, 2009

FORT DODGE – Since July 2008 dairy producers in Iowa have had access to a risk management tool that helps to minimize profit losses. The policy takes into account both the price of milk and feed costs.

The original concept for a program to protect dairy producers’ profits came from Ron Mortensen who, along with his wife, Susan Mortensen, owns AGRO Insurance LLC and AGRO Insurance LLC in Fort Dodge.

Part of their business was to underwrite LGM for swine and cattle. They wondered, “Why couldn’t this work for dairy, too?”

Chad Hart, Dr. Bruce Babcock and Dr. Dermot Hayes became the primary consortium group that adapted this policy for dairy. Livestock Gross Margin for Dairy is a USDA Federal Crop Insurance Corporation product managed by the Risk Management Agency.

The policy was first offered to Iowa dairy farmers in July 2008. Two months later Dairy Gross Margin LLC wrote its first LGM policy.

In January 2009, Marvin Carlson, of Sioux Rapids, who recently retired from teaching in the agriculture production technology program at Iowa Lakes Community College at Emmetsburg, was brought on staff to help facilitate this and other LGM policies.

Dairy Gross Margin, LLC works at providing dairy operations with the opportunity to have darned good marketing, or DGM.

Early adopters of this LGM have been seeing considerable returns on their premium investment since the slide in milk prices from higher levels in 2008.

“It offers another risk management tool for producers to evaluate,” said Mortensen. “LGM for dairy is a package, like bundled options. You have corn, protein and milk bundled together with no off-setting CME or CBOT transactions to create market shift.

“The premium goes into a pool held by RMA (Risk Management Agency) for payment of indemnities.”

Sold at the end of each month, LGM for dairy offers convenience to milk producers from the standpoint that they would not have to buy separate calls on corn and soybean meal and place a put to set a floor on the milk price. Eliminating exercising the strike price of put options could be the greatest benefit, said Mortensen, since most producers are working with their cows every day of the year.

“Or at least during times when the markets are trading,” he added.

Options also cover fixed amounts of commodities and those amounts may be too large to be used in the risk management portfolio of some farms.

Total cost of LGM for dairy to do the equivalent of the three above options has been less costly, Mortensen claimed. The strategy of how LGM fits the producer’s risk management plan is a key component since feed inclusion rates can be varied to match the nutrition plan of each farm.

“Another key aspect of this product is that it can be tailored to any size dairy farm,” said Marvin Carlson, representative for Dairy Gross Margin, LLC, based in Sioux Rapids. “Producers can choose their feed rations (and) production levels based on their own operations.

“A dairy producer can select a deductible premium level to fit his desired coverage level to complement other risk management tools he may be using.”

To enroll, a dairy producer needs to establish a policy with an underwriting company through an insurance agency such as Dairy Gross Margin LLC. This doesn’t involve a lot of paper work, Carlson said, and can be done at any time. At the end of each month, during the sales purchase period, the target marketing is submitted to establish a specific insurance.

Unlike FCIC crop insurance, a check for the premium is due when the target marketing is entered on the RMA computers. Beginning in July, the sales period will begin at 4:30 p.m. on the last Friday of each month.

If RMA calculates that an indemnity payment is expected at the end of an insurance period, they will send notification that a milk marketing report form needs to be completed and returned within 15 days.

This would provide proof that the insured production was marketed. After this is done, Carlson said, a check would be written to the dairy producer.

Producers also need to supply the total number of tons of corn or other feedstuffs used on their farms. A conversion spreadsheet brings protein and energy content back to corn and soy meal equivalents.

Producers determine the amount of milk they wish to insure and the amount of feed, within the predetermined range, they wish to include in the expected gross margin calculation.

It has been estimated that over time, at the 100 percent level, the numbers evaluated by the University of Wisconsin milk marketing analyst show it would pay slightly over 51 percent of the time.

Prudent buying is key as with any investment, advised Carlson. There is a time to participate and a time to watch. The first policies written have paid $4, plus per $1 premium cost.

When asked about its value during these days of low milk prices, Mortensen said, “The futures market milk prices for the latter part of 2009 look like there may be some opportunities for a good ‘price to value’ investment when comparing premium cost to expected gross margin calculated.”

Producer awareness and understanding of the LGM for dairy FCIC product is what Dairy Gross Margin LLC has recently been working on to achieve, Mortensen said.

At the end of each month numbers are recalculated based on three days average of corn, soybean, meal and class III milk.

Opportunities may present themselves when least expected, so a decision to participate or not participate in LGM for dairy at least helps a producer make a marketing decision.

“Including LGM for dairy in the risk management tool box for evaluation at the end of each month may be the best suggestion I can currently offer,” Mortensen said.

Contact Renae Vander Schaaf by e-mail at renaefarmnews@gmail.com.

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