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Insurance product protects producers from feed costs, market drops

By Staff | Oct 22, 2010

Ron Mortensen, with Advantage Agricultural Strategies Ltd. Introduced a new insurance product on Oct. 7, which is available to livestock producers. He made his presenation to members of the Fort Dodge Area Chamber of Commerce’s Ag Committee at the Webster County Extension office in Fort Dodge.

FORT DODGE – A new insurance product designed for cattle, swine and dairy producers, is designed to protect the margin between feed costs and the falling market prices.

Ron Mortensen, with Advantage Agricultural Strategies Ltd., in Fort Dodge, spoke to members on Oct. 14 at the Fort Dodge Area Chamber of Commerce’s Ag Committee meeting to explain the program.

Mortensen, who operates the agricultural market consulting firm in Fort Dodge, told the group that the relatively new product, called livestock gross margin insurance, has become available in recent years to livestock producers.

To show how LGM works, Mortensen said used a hypothetical dairy operation saying an LGM protects the margin between feed costs and the falling milk prices.

LGM-Dairy, he said, uses futures prices for corn, soybean meal and milk to determine the expected gross margin and the actual gross margin. The program is supported by the government, he said.

Ron Mortensen, Advantage Agricultural Strategies Ltd. of Fort Dodge.

The insurance does not, however, cover any loss due to death, unexpected milk loss or unexpected increases in feed use, Mortensen said.

There are several states where dairy farmers are eligible for the LGM-Dairy insurance including Iowa, Minnesota and Nebraska and only milk sold for commercial or private sale that is intended for final human consumption from the dairy cattle fed in the eligible states qualifies for the coverage.

The insurance period contains the 11 months following sales closing. For example, the insurance period for January sales closing date contains the months of February through December. However, coverage begins in the second month of the insurance period, so the coverage period for this example is the months March through December.

According to information provided on the LGM-Dairy website, an LGM has two advantages over traditional options. The first being convenience. Producers can sign up for LGM 12 times per year and insure all of their milk production they expect to market over a rolling 11-month insurance period. The producer does not have to decide on the mix of options to purchase, the strike price of the options or the date of entry.

The second advantage is customization. The LGM policy can be tailored to any size farm. Options cover fixed amounts of commodities, and those amounts may be too large to be used in the risk management portfolio of some farms.

LGM, Mortensen said, differs from traditional options because the LGM is a bundle option that covers both the price of milk and feed costs.

The mix of target milk marketings per dairy cow and target feed rations are supplied by the producer. This feature, according to information provided, allows the producer to select feed rations and production levels that best reflect their actual production situation. The resulting bundle of options effectively insures each participating producer’s gross margin, milk revenue minus feed costs, over the insurance period.

LGM works as a bundle of options that pay the difference, if positive, between the value at purchase of the options and the value at the end of a certain time period.

Contact Kriss Nelson at “mailto:jknelson@frontiernet.net”>jknelson@frontiernet.net.

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