Can insurance provide the US dairy farm safety net? (original) (raw)
Related papers
2013
We examine the potential for currently proposed milk income over feed cost margin protection programs to displace dairy farmer use of private milk price risk management tools. Milk and feed price volatility have increased in recent years providing incentive to use risk management contracts. Using a mean-variance framework, we derive optimal farm hedge ratios with and without the subsidized government margin protection program. We find that the government program is likely to substitute for private risk management. However, the potential exists for the introduction of a margin financial instrument that would allow farmers to monetize the subsidized margin protection. This instrument could bring private hedgers back to the market. The U.S. federal government has a long history of active involvement in dairy markets with the purpose of supporting farm milk price. During the last decade, rising cost of production and expanding export markets have pushed farm milk prices higher than the government imposed price floor, while dairy producer profit margins have struggled. In particular, significantly higher feed prices have made the effective milk price floor ($9.90/cwt) largely irrelevant. These events in have resulted in the growing use of market based risk management tools by dairy farmers while encouraging interest in replacing government based price support with margin support. Past government dairy policies focused solely on supporting milk price. However, recent developments such as Livestock Gross Margin Insurance for Dairy Cattle (LGM) have begun to recognize the effectiveness of providing more complete protection encompassing both the milk price and feed price in the form of income-over-feed-cost (IOFC) margin insurance. 1 In response to calls for a new catastrophic risk insurance following the devastating farm financial year of 2009, consensus emerged among dairy farmers, processors, and elected representatives that a new federal dairy safety program should focus on establishing some type of IOFC margin 1 The LGM insurance product is a quasi public-private risk mitigation tool, sold through federal crop insurance companies and underwritten by the USDA Risk Management Agency currently provides an Asian basket type IOFC product to U.S. dairy farmers.
Journal of dairy science, 2010
Milk and feed price volatility are the major source of dairy farm risk. Since August 2008 a new federally reinsured insurance program has been available to many US dairy farmers to help minimize the negative effects of adverse price movements. This insurance program is referred to as Livestock Gross Margin Insurance for Dairy Cattle. Given the flexibility in contract design, the dairy farmer has to make 3 critical decisions when purchasing this insurance: 1) the percentage of monthly milk production to be covered, 3) declared feed equivalents used to produce this milk, and 3) the level of gross margin not covered by insurance (i.e., deductible). The objective of this analysis was to provide an optimal strategy of how a dairy farmer could incorporate this insurance program to help manage the variability in net farm income. In this analysis we assumed that a risk-neutral dairy farmer wants to design an insurance contract such that a target guaranteed income over feed cost is obtained ...
Agricultural Systems, 2011
The Livestock Gross Margin Insurance for Dairy Cattle is a federally reinsured insurance program that enables US dairy producers to establish minimum levels of milk income net of feed cost. Given the structure of this program there are an infinite number of possible contract designs based on the choice of deductible level and proportion of production insured. Adding to this complexity, producers vary in their risk preferences, which affect the incentive to insure their margin. It is unclear as to how producers may adopt this program for revenue risk management. This paper investigates the interplay between producer risk preferences, contract design and the subsidization of premium in determining program coverage. We undertook this analysis within an expected utility framework. Optimal contracts under different rates of constant relative rate of risk aversion and subsidies were analyzed using a nonlinear optimization model. We found that total optimal coverage increased significantly with the level of risk of aversion at lower deductibles but as deductible level increased, the level of risk aversion had a lesser impact on total optimal coverages. As expected, at the same deductible and risk aversion levels, inclusion of a premium subsidy increased the total optimal coverage.
2013
In this analysis we compare the total expected government outlays and distribution of benefits under newly proposed dairy margin insurance programs to those under existing counter-cyclical payment programs. We combine simulation and structural modeling techniques to forecast milk price and dairy income-over-feed-cost margins. Using the price forecasts we employ Monte-Carlo experiments to evaluate the total expected government outlays for a sample of 5000 representative farms given a constant relative risk aversion utility framework. We find that expected outlays favor large farm operations and are an order of magnitude higher than those under existing programs. Under the current policy framework (MILC), farms with less than 100 cows (76% of farms) account for 42% of net payments and farms over 1000 cows (2% of farms) account for 6% of net payments. Under the new policy regime farms with fewer than 100 cows will get 17-21% of net program benefits, and farms over 1000 cows will get 36...
Margin Protection Program for Dairy Producers: Implementation, Participation and Consequences
2014
In the period leading up to the start of the Margin Protection Program for Dairy Producers (MPP-Dairy), a survey was undertaken to assess dairy farmer knowledge, attitudes, impressions and expected participation decisions. All surveys were collected in July and August 2014. There are six main conclusions of the survey. First, prior to the announcement of USDA rules regarding MPP-Dairy, most dairy producers felt they had ‘some knowledge’ of the program, with close to 30 percent declaring ‘no knowledge’ about the program. Second, about thirty percent of respondents had somewhat or very favorable impressions of MPP-Dairy while similar percent had somewhat or very unfavorable. Top four concerns about the program were too much government involvement, program complexity, lack of supply management and fear that the program would distort market signals to farmers. Third, close to 40 percent of producers indicated they were leaning towards registering for MPP-Dairy, while 30 percent were lea...
2007
The major sources of variability in net farm income on New York dairy farms over the past 10 years are identified using Dairy Farm Business Summary records. The most important source of income variability is the fluctuation in milk prices, followed closely by year-to-year variation in the quantity of purchased feeds. These results suggest that forward pricing of milk and feed purchases may be effective risk reduction strategies. Since a few farms have large cull cow sales, probably due to disease or other production problems, new insurance products to insure against disease may be useful to dairy farmers. It appears that older farmers are more successful in engaging in activities that increase diversification and reduce the variability in reductions in farm income. The same is true for farmers who utilize milking parlors, use recombinant bovine somatotropin, have greater assets per cow, and have engaged in activities to earn income from off-farm sources.
2012
Livestock Gross Margin Insurance for Dairy Cattle (LGM-Dairy) is a recently introduced tool for protecting average income over feed cost margins in milk production. In this paper we examine the assumptions underpinning the rating method used to determine premiums charged for LGM-Dairy insurance contracts. The first test relates to the assumption of lognormality in terminal futures prices. Using high-frequency futures and options data for milk, corn and soybean meal we estimate implied densities with flexible higher moments. Simulations indicate there is no strong evidence that imposing lognormality introduces bias in LGM-Dairy premiums. The remainder of the paper is dedicated to examining dependency between milk and feed marginal distributions. The current LGM-Dairy rating method imposes the restriction of zero conditional correlation between milk and corn, as well as milk and soybean meal futures prices. Using futures data from 1998-2011 we find that allowing for non-zero milk-feed...