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Livestock Gross Margin-Dairy Insurance Found To Reduce Producer Risk By 28-39%
Potential To Induce Milk Supply Expansion Seen As Modest Across Regions
Washington—Had Livestock Gross Margin-Dairy insurance (LGM-Dairy) been widely available during the 2001-2011 period, reductions in dairy producer risk would have ranged from 28 to 39 percent, according to a new analysis from USDA’s ERS.
And based on the estimated risk-reduction levels, and risk elasticities, the potential for LGM-Dairy to induce an expansion in milk supplies, if it had been more widely available and adopted, was modest across the 13 dairy-producing regions analyzed, ranging from 0 to 3 percent, the analysis noted.
The upper end of this range is unlikely because producer participation has been far below 100 percent to date, and because the upper estimate requires producer supplies to respond strongly to changes in risk.
The main incentive for producers to expand supply comes from subsidies currently offered on the LGM-Dairy insurance premiums.
Generally, results of the analysis suggest that insuring both output prices and feed costs is more effective for managing risk than insuring output prices alone and appears to produce similar risk management performance across the selected regions.
LGM-Dairy, as a gross margin insurance program, is more flexible in terms of coverage than other risk management tools, such as hedging in futures or options markets, which likely makes LGM-Dairy more attractive for small dairy farms, according to the analysis, entitled Livestock Gross Margin-Dairy Insurance:
An Assessment of Risk Management and Potential Supply Impacts.
LGM-Dairy is a relatively new public risk management program overseen by USDA’s Risk Management Agency (RMA). It was designed to reduce the negative effects of milk and feed price volatility on US dairy farms. LGM-Dairy was first made available in June of 2008 for the 2009 livestock reinsurance year and has been available for each reinsurance year since that time.
The LGM-Dairy program is an insurance product that provides compensation to dairy producers for qualifying losses paid under the product’s specifications, the report explained.
The 2014 farm bill includes a voluntary margin protection .