Risk-management policy protects margins for dairies

By CAROL RYAN DUMAS

Capital Press

Changes to USDA's Livestock Gross Margin insurance program for dairy made it appealing enough to dairymen that the program ran out of money for the 2011 crop year.

The changes went into effect Dec. 17, and policy sales started popping, said Jo Lynne Seufer, risk-management specialist with USDA Risk Management Agency in Spokane, Wash.

The program sold out in March.

In December, USDA began subsidizing premiums and changed the premium payment date from the day producers sign up to the end of the coverage period, she said.

"We're excited for the improvements we made and the interest and action. Producers felt it may be a risk-management tool that might help them," she said.

The insurance program protects a producer's margin between milk prices and feed costs with a put option that protects against the downside price on milk, and a call option that protects against the upside on the price of feed.

When the program expanded to all states in the lower 48 for the 2011 crop year, larger producers didn't see much benefit to the program because it has a production cap of 240,000 hundredweight of milk, Seufer said.

She told them when the program becomes permanent, that cap could be raised, and they should try it out. Producers took her up on it, upping policies to 27 in Idaho and 40 in Washington, she said.

"There was a lot of interest in Oregon, but we ran out of money," she said.

Opening the program to additional states and market factors contributed to participation, said Wilson Gray, extension livestock economist with University of Idaho.

The majority of Idaho dairies would fit within the 240,000 hundredweight cap, he said, which represents the national average annual production of a 1,200-cow dairy.

Idaho breaks up it's producers in brackets above and below 2,000 cows, and only a little over 100 of its 500-plus dairy farms have 2,000 cows or more, he said.

In addition, rising feed costs, which started climbing last August, and more volatile milk prices began breaking down any confidence the industry started gaining back at the end of 2009 and into 2010, he said.

"Producers and financers are pretty nervous," he said.

Over the past 10 years, total annual USDA expenditures on all the livestock plans -- including beef cattle, swine and lamb -- had never exceeded $5 million of the $20 million allocated. The changes in December resulted in a dramatic and immediate increase in dairy policy sales, and the $16 million allocated for dairy was tapped out in March, Seufer said.

While the program runs on a crop-year basis, funding is allocated on an fiscal-year basis, and funding for the 2012 crop year will depend on reauthorization Oct. 1.

With Congress focused on the federal budget, it's hard to say how funding for some of these programs will fare, Gray said.

The program is administered by USDA but owned and maintained by Iowa Agricultural Insurance Innovations.

Livestock Gross Margins for Dairy Cattle Insurance

2011 crop year (began July 1, 2010)

State Policies Cwt. of milk Liability coverage indemnity payments

Idaho 27 1, 404,675 $22,132,484 0

Ore. 1 360,000 $5,806,800 0

Wash. 40 2,427,148 $39,415,482 0

Calif. 38 4,380,941 $73,627,704 $695

U.S. 1,226 46,208,715 $770,270,128 $56,506

Source: USDA Risk Management Agency