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Livestock Gross Margin–Dairy: An Assessment of Its Effectiveness as a Risk Management Tool and Its Potential to Induce Supply Expansion

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  • Burdine, Kenneth H.
  • Kusunose, Yoko
  • Maynard, Leigh J.
  • Blayney, Donald P.
  • Mosheim, Roberto

Abstract

An evaluation of the risk-reducing effectiveness of the Livestock Gross Margin–Dairy (LGM-Dairy) insurance program, using historical futures price data, predicts economically significant reductions in downside margin risk (24–41%) across multiple regions. Supply analysis based on the estimated risk reduction shows a small supply response, assuming minimal subsidization. A decomposition of the simulated indemnities into milk price and feed price components shows comovements in futures prices moderating the frequency and levels of indemnities.

Suggested Citation

  • Burdine, Kenneth H. & Kusunose, Yoko & Maynard, Leigh J. & Blayney, Donald P. & Mosheim, Roberto, 2014. "Livestock Gross Margin–Dairy: An Assessment of Its Effectiveness as a Risk Management Tool and Its Potential to Induce Supply Expansion," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 46(2), pages 1-12, May.
    • Handle: RePEc:ags:joaaec:169014
    DOI: 10.22004/ag.econ.169014
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    References listed on IDEAS

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    1. Gould, Brian W. & Cabrera, Victor E., 2011. "USDA's Livestock Gross Margin Insurance for Dairy: What Is It and How Can It Be Used for Risk Management," Staff Paper Series 562, University of Wisconsin, Agricultural and Applied Economics.
    2. Bozic, Marin & Newton, John & Thraen, Cameron S. & Gould, Brian W., 2012. "Mean-reversion in Income over Feed Cost Margins:Evidence and Implications for Managing Margin Risk by U.S. Dairy Producers," Staff Papers 132379, University of Minnesota, Department of Applied Economics.
    3. Liang, Yan & Miller, J. Corey & Harri, Ardian & Coble, Keith H., 2011. "Crop Supply Response under Risk: Impacts of Emerging Issues on Southeastern U.S. Agriculture," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 43(2), pages 181-194, May.
    4. William Lin & Robert Dismukes, 2007. "Supply Response under Risk: Implications for Counter-Cyclical Payments' Production Impact," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 29(1), pages 64-86.
    5. Leigh J. Maynard & Christopher Wolf & Matthew Gearhardt, 2005. "Can Futures and Options Markets Hold the Milk Price Safety Net? Policy Conflicts and Market Failures in Dairy Hedging," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 27(2), pages 273-286.
    6. Buschena, David E. & McNew, Kevin, 2005. "An Exploration of Market Pricing Efficiency: The Dairy Options Pilot Program," 2005 Annual meeting, July 24-27, Providence, RI 19271, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    7. Luh, Yir-Hueih & Stefanou, Spiro E., 1989. "Dairy Supply And Factor Demand Response To Output Price Risk: An Econometric Assessment," Northeastern Journal of Agricultural and Resource Economics, Northeastern Agricultural and Resource Economics Association, vol. 18(2), pages 1-6, October.
    8. Bozic, Marin & Gould, Brian W., 2009. "The Dynamics of the U.S. Milk Supply: Implications for Changes in U.S. Dairy Policy," Staff Paper Series 540, University of Wisconsin, Agricultural and Applied Economics.
    9. Bakhshi, Samira & Kerr, William A., 2009. "Is There Supply Distortion In The Green Box? An Acreage Response Approach," Working Papers 51093, Canadian Agricultural Trade Policy Research Network.
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    Cited by:

    1. Mark, Tyler B. & Burdine, Kenneth, 2015. "Will the New Dairy Margin Protection Program Reduce Risk for Dairies?," 2015 Annual Meeting, January 31-February 3, 2015, Atlanta, Georgia 196878, Southern Agricultural Economics Association.
    2. Mark, Tyler B. & Burdine, Kenneth H. & Cessna, Jerry & Dohlman, Erik, 2016. "The Effects of the Margin Protection Program for Dairy Producers," Economic Research Report 262192, United States Department of Agriculture, Economic Research Service.

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