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September 26
Dairy Margin Protection Options

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Based upon the recent announcement with from the USDA regarding the margin protection program (MPP), dairy producers currently enrolled (MPP) now have the option to enroll or opt out of the MPP for 2018. http://bit.ly/2y3EYdx 

This sets the stage for you to evaluate other margin management options. 

One program available is the Livestock Gross Margin for Dairy program (LGM-Dairy), an insurance plan for you to protect from declining gross margins when feed costs rise or milk prices drop. LGM-Dairy has proven to be a useful tool for insuring margins. Gross margins are determined by the market value of milk minus feed costs. For LGM-Dairy calculations, future prices for corn, soybean meal, and milk are used to determine the expected gross margin. Using LGM-Dairy is similar to purchasing a call option to limit higher feed costs and a put option to set a floor on milk prices.

Your costs for LGM-Dairy are determined by the dollar deductible you choose (ranges from $0 to $2 in $0.10 increments), the higher the deductible, the lower the premium. In addition, the LGM-Dairy premiums depend on the hundred weights you cover, number of months included, deductible level, and futures and price volatility. If you are considering enrolling in the LGM-Dairy program, here are a few facts for you to consider:

• How and When to Opt Out: To opt out of the Margin Protection Program, farmers should not sign up during the annual registration period. Those interested in participating in LGM-Dairy will be able to purchase coverage beginning with the November 2017 sales period, with coverage taking effect in January 2018. 

• Funding is Limited: The USDA has a set amount of funds allocated to this program. The funds are distributed on a first come-first served basis each month. Producers looking to participate in the program should be ready to enroll on sign up day, which is the last business Friday of the month.

• LGM does not cover Producer Price Differentials (PPD): Prices for the LGM-Dairy are based on simple averages of Chicago Mercantile Exchange Group futures contract daily settlement prices and are not based on local payments or deductions. 

• Timing is Key: Due to limited funding, those considering enrolling in the LGM-Dairy should meet with their agent ahead of time to begin the application process and have records ready. Because enrollment begins on Friday, agents must be available to enter in the information Friday afternoon and many times on Saturday. 

• LGM Sets a Floor, not a Ceiling: When considering enrollment in LGM-Dairy, it is important to remember the program sets a floor on your prices, not a ceiling. If market margins exceed your coverage level, you will still receive the market margin. However, if margins fall below your coverage level, you are protected at the level you have secured through LGM-Dairy.​

• USDA Resource: More information regarding the LGM-Dairy program is available at: http://bit.ly/2fl8ccd​

If you have interest in discussing the best margin protection options for your operation, give us a call at 800-444-3276 or stop in to see us at your local branch to speak with your financial services officer or crop insurance specialist.​


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