Why LGM Is Better Than Standard Insurance
“I don’t like insurance.” This is a phrase I commonly hear when talking to farmers while on the road. It seems insurance has become a larger and larger piece of farm risk management and it can be unbearable at times, even to me, an agent. Though we feel swamped in insurance premium talks, it is something we need to be considering in these times of slim margins and high risk.
Livestock Gross Margin (LGM) Insurance is one of these insurances that is worth considering and learning more about. LGM provides producers a means of locking in a margin on their milk.
LGM is a federally subsidized insurance product just like the crop insurance most of us carry. Like many insurance products, it seems extremely complicated at first glance but it is straight forward when you break it down. To determine the expected margin, we look at the price the CME futures closes for class 3 milk, corn and soybean meal. There are no hidden equations or complicated math. All data comes from the closing prices on the CME. An indemnity would be paid when the final margin is less than the expected margin. For every hundredweight of milk insured, we protect feed also. Feed is an important piece of LGM because it enhances the chance of an indemnity due to how feed markets trend over time. This allows producers to ease their mind on both milk price and feed inputs.
Like all insurance, LGM is not meant to make the producer money – although it has done just that. LGM is meant to bridge a gap when milk drops drastically, or feed prices rapidly increase. For example, in the spring of 2020 LGM paid $2.23 and $3.28 in April and May when milk prices dropped. Early in 2021 during January, February and March, payments were based on a drastic increase in feed value. From 2008 to 2020 on a plan protecting milk seven months out, LGM has paid back on average $.38 per hundred weight per year after expenses.
When a producer consistently protects themselves from a drastic drop such as we saw in 2020, or feed increases in 2021, LGM helps them from playing
catch-up for months to come and has provided a net return overtime.
We are fortunate to have many farmers who have experienced these benefits; they are great advocates for this product.
LGM Dairy purchased consistently can protect you and your farm from the ever-increasing volatility in today’s markets. Contact Travis Glaser at ARM Services today to learn more: 715-456-5607.
This article was written by ARM Services, whom FarmFirst Dairy Cooperative has partnered with to provide resources and expertise on dairy risk management. Whether you are wrapping your head around risk management for the first time or asking questions about a new strategy, we are confident that ARM Services can answer your questions and build a plan that works to meet your goals.
