A discussion of risk management tools for dairy producers usually starts with how to manage milk price risk. There are also tools to use to reduce the price risk for feeder or fat cattle you sell from your dairy operation.
Livestock Risk Protection (LRP) is one choice and has recently been improved. This product allows you to buy coverage to reduce the risk of falling prices of feeder or fat cattle inventories.
LRP is very similar to Dairy Revenue Protection (Dairy-RP) and Livestock Gross Margin for Dairy (LGM-Dairy), as it is underwritten and supported by USDA’s Risk Management Agency (RMA), the government agency managing federal crop insurance. It is essentially crop insurance for feeder cattle and fat cattle. LRP is especially advantageous because it is significantly cheaper to cover risk versus using Chicago Mercantile Exchange (CME) options.
LRP will look and feel like a subsidized feeder cattle or live cattle put option. It can be purchased almost every day. Premiums are paid at the end of coverage. The premium subsidies range from 35% to 55%. You will be able to look out 52 weeks for coverage. For feeder cattle, you can cover 6,000 head per endorsement and up to 12,000 head annually. The same limits apply for fat cattle.
An original fact sheet regarding LRP is available here.
Information regarding recent revisions is available here.
Risk management options for milk prices
Here’s an update on important dates regarding two milk price risk management tools, Dairy-RP and LGM-Dairy.
- Dairy-RP coverage is generally available for milk produced four or five quarters out in the future. Currently, coverage is available for all four quarters of 2021. Dairy-RP is available every day except holidays and USDA report days that could impact markets (see calendar). Dairy-RP is also not available on days when applicable futures contracts move limit-up or limit-down. In July, the RMA made improvements to Dairy-RP policies, increasing the declared protein and butterfat ranges and making Grade B milk insurable. Class IV milk components are now available. Visit with your agent about this new addition to the Dairy-RP possibilities.
- The next scheduled sales period for LGM-Dairy is Friday, Sept. 25. Coverage is available for up to 10 months, so you will be able to buy coverage for November 2020 through August 2021. You need to select coverage in two-month increments to get the premium subsidy. LGM-Dairy covers milk prices (from falling) and also includes coverage for feed prices rising. LGM-Dairy is not only a milk price put option, but a call option on the price of corn and soybean meal. We are anticipating additional changes to LGM-Dairy in the near future.
Dairy-RP and LGM-Dairy coverage is available through a licensed and trained crop insurance agent.
One other reminder, the enrollment period for USDA’s Dairy Margin Coverage (DMC) program opens on Oct. 12 and runs through Dec. 11.
Ron Mortensen, co-owner of Dairy Gross Margin LLC, provides monthly updates on Dairy-RP and LGM-Dairy coverage for the readers of Progressive Dairy. Mortensen also recently shared insights regarding risk management in an I-29 Moo University podcast.
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