Dairy Gross Margin

Alphabet Soup or the ABC’s of Dairy Programs

There are lots of letter combinations to describe the old/new government and insurance programs available to dairy farmers. I thought it might be nice to create a scorecard to keep them straight. There are five programs in all. We will talk about MFP, MPP, DMC, DRP and LGM. Wow, what a bunch of letters.

Market Facilitation Program (MFP): Most of you have heard about the $.12/cwt payment due to the US and China trade issues. As you already know, the program has its shortfalls, including using old milk production databases. This money is available once FSA offices are open (January 24^th to February 8^th). This product is administered by the FSA.  

Margin Protection Program (MPP): This program ended in December, 2018—sort of! The payouts were minimal until the USDA improved the program in the middle of 2018. For those of you who did sign up in 2018 (and before), you will receive some benefits under the new Farm Bill. You can receive 50% of the premiums you paid as a refund.  This probably does not include the $100 fee.  Your second choice is to receive 75% of the past premiums if you apply them to the new Dairy program called DMC.  If you had LGM-Dairy in 2018, the USDA will allow you to go back and sign up for MPP and receive the benefits you missed in 2018. This program is administrated by your FSA office. Your FSA office will work with you on MFP when they reopen from January 24^th to February 8^th.

Dairy Margin Protection (DMC): DMC is the new USDA program that is part of the 2018 Farm Bill. I suspect the rules and regulations have not written yet. This is similar to MPP but has a maximum $9.50 guarantee, which $1.00 higher. The premiums are lower. One benefit is you can sign up for 5 million pounds of milk no matter what size you are. If you are over the 5 million pounds, you can then cover milk with as low as $4.00 coverage, which is virtually free. With DMC, you can use Dairy Revenue Protection (DRP) and LGM-Dairy (LGM). This is a change from the rules governing the previous MPP. Coverage signup and additional details can be found at your FSA office.  Additional info:  https://dairymarkets.org/PubPod/Pubs/BP18-02.pdf

Dairy Revenue Protection (DRP): DRP is the newest dairy insurance program. You can use DMC and DRP on the same milk. It acts like a CME subsidized milk put option. With DRP, you can buy quarterly coverage starting with the second quarter (April, May and June). Each additional quarter of 2018 can also be covered. Eventually you will be able to cover up to five quarters. Coverage levels can be between 70% and 95%. The premium for this product is subsidized from 44% to 59%. Coverage can be on Class III, Class IV or Components. The premium is due at the end of the coverage period. DRP has no milk production limits, meaning you can insure 100% of your milk production. DRP premiums are different in each state.  DRP can be purchased any business day except holidays and the three days/month with USDA dairy reports. DRP is a USDA/RMA insurance product similar to crop insurance and is purchased from a licensed, trained crop insurance agent.

Livestock Gross Margin-Dairy (LGM): This dairy insurance program has been available since 2008 and has had many improvements over the years. LGM can now be used with DMC. LGM will act very similar to a subsidized CME milk put option.  It can be purchased with different coverage levels ranging from $0 deductible to $2.00 deductible. Most dairymen have used the $1.00 deductible, which has a premium that is 48% subsidized. The $0 deductible is subsidized at the 18% level. You must purchase more than two months of coverage to receive the premium subsidies. LGM purchases can be made the last business Friday of the month.  You can cover Class III milk out 10 months. Premiums are due at the end of the marketing period – in some cases, premiums may not be due for 11 months.  LGM is also a USDA/RMA insurance product similar to crop insurance and is purchased from a licensed, trained crop insurance agent. A 240,000 cwt limit for a 12 month period still exists for this product. As I said before, this product has evolved over the years and I would expect to see more improvements.

Using Multiple Government and Insurance Products: There are no restrictions on the use of DMC and DRP or LGM.  You can use DRP and LGM in the same year, but not on the same milk and not in the same quarter.  For example, you can purchase DRP for the second quarter (April, May, June) and then purchase LGM to cover the following months (July through December).  Our research indicates LGM premiums are cheaper than DRP premiums in some states. 

Ron Mortensen is the owner of Dairy Gross Margin, LLC, an agency that specializes in DRP & LGM-Dairy products, and owner of Advantage Agricultural Strategies, Ltd., a commodity trading advisor. 

ron@dairygrossmargin.com   www.dairygrossmargin.com