Dairy farmers who still have the option could protect milk income margins through the USDA Risk Management Agency’s Livestock Gross Margin for Dairy (LGM-Dairy) program, while leaving open the opportunity for milk price increases, according to Alan Zepp, risk management program manager at Pennsylvania's Center for Dairy Excellence.

Natzke dave
Editor / Progressive Dairy

A reminder: By law, producers already enrolled in USDA’s Margin Protection Program for Dairy (MPP-Dairy) can’t participate in LGM-Dairy.

Zepp provided a dairy market update and discussed risk management options during his monthly “Protecting Your Profits” conference call, June 22.

Risk management options

The Margin Protection Program for Dairy (MPP-Dairy) March-April margin was announced at about $7.15 per hundredweight.

Based on current futures prices, Zepp said expected MPP-Dairy margins will average $5.90 per hundredweight for the May-June pay period, providing an indemnity payment of about $0.60 per hundredweight for any producer insured at $6.50 per hundredweight.


Using an example herd of 100 cows with a production base averaging 22,222 pounds of milk per cow per year, Zepp said a herd protecting $6.50 per hundredweight on 90 percent of milk production would see a May-June indemnity payment of about $2,000.

Those payments will be calculated at the end of July, with MPP-Dairy payments for the May-June period expected sometime around mid-August.

With the recent rise in milk futures prices, forecasted MPP-Dairy margins for coming months have improved somewhat. Current pay-period projections are: July-August – $7.88; September-October – $9.02; November-December – $9.19; and the first half of 2017 in a range of $8.40-$8.90 per hundredweight.


Under LGM-Dairy, producers can insure milk income over feed cost margins for a 10-month period. The June 24-25 sales period offers coverage for August 2016 through May 2017. The policies are available through certified crop insurance companies.

The current 10-month (August 2016-May 2017) LGM-Dairy margin is expected to average $6.25 per hundredweight, with a low of about $5.76 per hundredweight in December2016-January 2017, and highs of $6.25 per hundredweight next April-May.

As of June 22, the cost of a zero deductible policy for the 10-month period was $0.83, with a $1 deductible policy costing about $0.30 per hundredweight.

Although not optimistic about milk prices taking off, Zepp said the milk price cycle is near the historical bottom. An LGM-Dairy policy could provide upside potential if there is an unexpected milk price rise.

In comparison, an October 2016 Class III $16.25 per hundredweight “put” was trading at $0.90 on June 22. An October 2016 Class III $15.25 “put” (similar to a $1 deductible LGM-Dairy policy) would cost $0.46 per hundredweight.

The cost for Class III puts/calls and LGM-Dairy premium payments have increased in recent weeks due to recent CME milk futures price volatility, Zepp said.

Dairy scorecard

Based on his latest dairy scorecard, Zepp said USDA’s May milk production report indicated 9.327 million cows averaged 74.1 pounds of milk per day during the month. Butter stocks are building, but less than April 2013. Cheese stocks are at a three-decade high, although U.S. per capita cheese consumption is up substantially from 30 years ago. A slightly weaker U.S. dollar may induce more U.S. dairy exports, although the global milk supply remains cumbersome.

Although milk and milk futures prices are improving, Class III milk prices remain about 25 percent below the three-year average, with Class IV milk prices about 22 percent below the three-year average. The Chicago Mercantile Exchange (CME) cash butter price is 44 percent above the Global Dairy Trade (GDT) price, and 63 percent more than the European Union butter price. CME nonfat dry milk prices are 45 percent less than the three-year average.

Historically, milk prices may be getting close to the bottom, although the global milk glut clouds that picture, Zepp said.

On the feed side of the equation, corn and soybean meal futures have jumped substantially in recent weeks. Nearby soybean meal futures are up $120 per ton in the past several weeks.

Find Zepp’s archived Protecting Your Profits podcast on the Center for Dairy Excellence website. Next month’s call is scheduled for July 27, with the next LGM-Dairy policy sales period set for July 29-30.  PD

Dave Natzke