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Calculating Risk as Milk Prices Sink and Soar
At 4:30 p.m. on the last business Friday of each month, dairy farmers across the country have 27 hours to decide whether to insure their milk income in a volatile market. "Milk prices can double or fall by half in any given year," says Brian Gould. He points to the 1995 change in the way milk is priced as the culprit that has forced dairy producers to become experts in risk management just to stay solvent. Gould's unique, award-winning website gives them a powerful decision-making tool.
Graph of milk price volatility
Milk price volatility
"Add to the mix the Renewable Fuel Standards (RFS) program that now claims 40% of the corn crop for ethanol, and you have big fluctuations in the price of feed, as well," he explains. A drought in New Zealand can profoundly stimulate the export market for U.S. dairy products, while drought at home raises the cost of feed and other inputs. "A bushel of corn before RFS cost $2.50, but during the drought of 2012 corn rose to $7.70, which made milking cows a lot more expensive."
In 2008, the USDA Risk Management Agency responded to price volatility with a new type of insurance to help dairy farmers protect their bottom line: the Livestock Gross Margin for Dairy (or LGM Dairy) program.
Knowing how complex a set of variables would be in play to administer such a program, Gould and his colleague Victor Cabrera set out to help both insurers and farmers figure it out. "In the first years, we ran workshops all over the country for crop insurers, who didn't know how to design policies for this new program," he said. "Now we're helping farmers from Vermont to California."
Farm Gould's website offers daily updates on the futures prices of feed and fluid milk, which are used to determine LGM-Dairy insurance premiums. A web-based decision tool lets operators estimate future dairy income, feed costs, and insurance premiums under alternative insurance deductible levels. It's also a boon for insurers. "Without the LGM Dairy website, we would be in the dark ages," says insurance agent Ronald Mortensen. "We use the calculator designed and maintained by Dr. Gould extensively to show producers what the estimated premium will be for LGM Dairy. I also use the website to review and test past performance of the LGM product. Our customers, the dairymen, use the calculator to estimate premiums and also estimate potential indemnities due them." Another agent comments that the website "actually allows agents and clients real insight into how milk margin can be managed." Gould's LGM Dairy Analyzer is unique in the country and is used nation-wide each month. In 2012, his Understanding Dairy Markets website won the Outstanding Electronic Media Education award from the Agricultural and Applied Economics Association.
"We're the go-to site in the country for dairy producers who need a few extra weeks to analyze the terms of contracts before deciding whether and how much insurance to purchase," says Gould.
AAE News
Last updated on Tue, May 13, 2014 11:57am