Livestock Gross Margin Insurance for Dairy Cattle: An Overview for Wisconsin Dairy Producers

Introduction

Livestock Gross Margin Insurance for Dairy Cattle (LGM-Dairy) is a federal crop insurance product that protects dairy producers against a decline in the expected gross margin between milk revenue and feed cost. The program was first made available in 2008 and is administered by the USDA Risk Management Agency (RMA) under the Federal Crop Insurance Corporation (FCIC). LGM-Dairy coverage is sold by private crop insurance agents, underwritten by FCIC, and is broadly available across the country, including all of Wisconsin. Producers should confirm current state and county availability with an approved insurance provider.

This article describes how LGM-Dairy works, what it covers, how the premium and subsidy are structured, and the key rule changes that take effect for the 2026 and succeeding crop years. LGM-Dairy is one of several federal dairy risk management programs, and a short section at the end of this paper describes how it relates to Dairy Margin Coverage (DMC) and Dairy Revenue Protection (DRP).

What LGM-Dairy Covers

LGM-Dairy insures the gross margin between the market value of milk and the cost of feed. Gross margin under LGM-Dairy is defined using CME Group futures prices, not the prices a producer actually receives or pays locally. LGM-Dairy uses a single pricing approach based on CME Class III milk futures and CME corn and soybean meal futures. Unlike Dairy Revenue Protection, LGM-Dairy does not offer a Class IV pricing option, a class-weighting election, or a component pricing option. The pricing methodology is fixed. Specifically:

• The expected and actual milk price is the simple average of the daily settlement prices of the CME Class III milk futures contract over a defined three-day price measurement period. For expected prices, this is the three trading days before and including the sales closing date. For actual prices, this is the last three trading days before the contract’s last trading day. The result is a simple average of those three daily settlements, not a volume-weighted average.
• The expected and actual corn price is based on CME corn futures contract settlement prices, averaged across the same three-day measurement periods. For months that do not have a corn futures contract expiring, the corn price is the weighted average of the surrounding contract months.
• The expected and actual soybean meal price is based on CME soybean meal futures contract settlement prices, averaged across the same three-day measurement periods. For months that do not have a soybean meal futures contract expiring, the soybean meal price is the weighted average of the surrounding contract months.

If the actual total gross margin for the insurance period is less than the gross margin guarantee, the producer receives an indemnity equal to the shortfall. The indemnity is paid once, at the end of the insurance period, based on actual marketings reported by the producer.

Although the producer’s actual milk price and feed costs at the local market are not used in the calculation, the producer’s actual production level is a factor. Indemnities are calculated on target marketings declared at sign-up, and if actual marketings for a month are less than 85 percent of cumulative target marketings for that month, the indemnity for that month is prorated. The 85 percent threshold is measured against cumulative target marketings, so under-marketing in earlier months can be made up in later months without triggering proration. Producers should plan target marketings carefully and submit a marketing report with supporting sales receipts at the end of the insurance period.

Because LGM-Dairy uses CME Class III milk futures as its milk price reference, it is most directly aligned with producers whose milk is used primarily in cheese manufacturing. It does not reference the Federal Milk Marketing Order blend price or the Class IV price. The gap between the CME Class III value used in LGM-Dairy and the actual price a producer receives is basis risk, and LGM-Dairy does not protect against it. Basis risk has three layers for Wisconsin producers. First, CME Class III futures prices for a future month can differ from the eventual realized monthly Class III price for that month, because futures reflect market expectations that update daily while the realized price is an average that prints after the month ends. Second, the Upper Midwest FMMO blend price can diverge from Class III in any given month based on the order’s class utilization mix. Third, the Upper Midwest is a multiple component pricing order, which means producers are paid on butterfat pounds, protein pounds, other solids pounds, and a producer price differential rather than on the Class III price itself. The CME Class III contract reflects an implied standard milk composition. A producer with above-standard butterfat or protein tests can have an actual milk check materially higher than the Class III value, and a producer with below-standard tests can have a check materially lower. LGM-Dairy indemnities are calculated on the Class III futures-derived value either way.

LGM-Dairy does not insure against: dairy cattle death or disease, unexpected decreases in milk production, unexpected increases in feed use, anticipated or multiple-year declines in milk prices, or anticipated or multiple-year increases in feed costs. It is a margin-based price risk product.

How LGM-Dairy Works

LGM-Dairy is sold every Thursday. The sales period opens when RMA posts the coverage prices and rates on its website on Thursday and closes at 9:00 AM Central Time the following day. If the Thursday falls on a federal holiday, or if expected milk and feed prices are not available on the RMA website, LGM-Dairy is not offered for sale that week.

Each purchase establishes an insurance period of 11 months following the sales closing date. Coverage begins in the second month of the insurance period; the first month is not insurable. Within the 11-month period, a producer can designate target marketings for any combination of 1 to 10 of the remaining months. A producer does not have to insure all months. The premium subsidy, however, is only available if the producer designates target marketings in at least two months of the insurance period, so the practical decision is between insuring 2 to 10 months (with subsidy) or 1 month (without subsidy).

There is no minimum or maximum number of hundredweights a producer can insure under LGM-Dairy. A prior annual cap of 240,000 hundredweight was removed under the 2018 Farm Bill, and the program now accommodates operations of any size.

Indemnities, if any, are calculated based on the actual gross margin across all insured months once the relevant CME futures contracts have expired and final prices are posted by RMA. If a probable loss occurs, the producer’s Approved Insurance Provider issues a Notice of Probable Loss, and the producer has 15 days to submit a marketing report with supporting sales receipts showing actual marketings for each insured month. Producers may elect to receive the indemnity in the month following their last insured month rather than waiting until the end of the full 11-month insurance period.

Premium Structure and Subsidy

The producer selects a per-hundredweight deductible between $0.00 and $2.00 in $0.10 increments. The deductible is the portion of the expected gross margin the producer chooses not to insure. A higher deductible produces a lower gross margin guarantee, a lower premium, and a higher subsidy rate.

Premium subsidy rates are set by deductible level, not by the length of the insurance period. Subsidy rates range from 18 percent at a $0.00 deductible to 50 percent at a $2.00 deductible, with intermediate rates at each $0.10 step. A premium subsidy is only available when the producer designates target marketings in at least two months of the insurance period.

The premium amount itself depends on target marketings, expected gross margin by month, deductible level, and the implied volatility of the underlying futures markets at the time of sale. Because volatility is a direct input, premiums for identical coverage can vary significantly from one Thursday sales period to the next. The premium is due at the end of the insurance period, not at the time of purchase.

Feed Ration Customization

Producers must report target quantities of corn and soybean meal (or corn and soybean meal equivalents) to be fed each insured month. The quantities are bounded:

• Corn or corn equivalent: between 0.00364 and 0.0381 tons per hundredweight of milk.
• Protein meal or protein meal equivalent: between 0.000805 and 0.013 tons per hundredweight of milk.

Producers who do not wish to choose custom feed amounts may use the default values of 0.014 tons (0.5 bushels) of corn and 0.002 tons (4 pounds) of soybean meal per hundredweight of milk. Feeds other than corn and soybean meal can be converted to corn or soybean meal equivalents using the conversion factors published in the LGM for Dairy Commodity Exchange Endorsement. A producer who grows feed on farm, or who uses substantially different rations than the default, can tailor the reported ration within the allowed bounds to better match the farm’s actual cost structure.

Rule Changes Effective for the 2026 and Succeeding Crop Years

The FCIC Board of Directors approved revisions to the LGM-Dairy policy and handbook that apply to the 2026 and succeeding crop years. The LGM-Dairy crop year runs July 1 through June 30, with the crop year designated by the calendar year in which it ends. The key changes are summarized below.

Termination date. The termination date of the LGM-Dairy policy was moved from June 30 to September 30. This aligns the end of the policy period with the revised premium billing timing described below.

Premium billing timing. The definition of the premium billing date was revised so that billing occurs one calendar month later than under the prior wording. For each Specific Coverage Endorsement, the premium billing date is the earlier of (1) the first day of the second month following the last month of the insurance period in which the producer has target marketings, or (2) the billing date shown in the actuarial documents.

Subsidy capture prohibition. A definition of subsidy capture was added, and the use of exchange-traded livestock contracts or other mechanisms to offset coverage for the purpose of capturing the premium subsidy is prohibited. The policy authorizes access to brokerage records for the investigation of potential violations, and the handbook sets procedures for requesting and handling such records. Insured and agent certification statements related to subsidy capture are now part of the endorsement documentation.

Eligibility and delinquent debt. The policy clarifies that no new applications or new Specific Coverage Endorsements will be approved after an insured becomes ineligible for federal crop insurance, including in cases associated with delinquent debt. Ineligibility and termination provisions are aligned across the livestock insurance programs.

Assignments and indemnity payment mechanics. Dispute-resolution responsibilities are clarified when an assignee submits forms and claims after the insured fails to do so. The policy allows issuance of indemnity to a single payee when the relevant parties agree in writing.

Table 1. Summary of LGM-Dairy rule changes effective for the 2026 and succeeding crop years

How LGM-Dairy Relates to Other Dairy Programs

LGM-Dairy is one of several federal risk management programs available to U.S. dairy producers, and the coordination rules matter when producers select coverage.

Dairy Margin Coverage (DMC). DMC is administered by the USDA Farm Service Agency, not RMA, and pays producers when the national all-milk price minus a national average feed cost margin falls below a producer-selected coverage level. Under the 2018 Farm Bill, producers may participate in both LGM-Dairy and DMC. The two programs use different price and cost benchmarks and target different portions of the production history.

Dairy Revenue Protection (DRP). DRP is also administered by RMA and insures against a decline in quarterly milk revenue. LGM-Dairy and DRP can be used in the same crop year, but only one of the two can have endorsements in effect for the same quarterly insurance period. In other words, a producer can move between LGM-Dairy and DRP across quarters, but cannot double-insure the same milk production quarter under both products. Coordinating with an insurance agent is important to avoid overlap.

Livestock Risk Protection (LRP). LRP is a separate RMA livestock product that, for the 2026 crop year, covers price declines on fed cattle, feeder cattle, and swine. It is not a dairy margin product and does not cover milk. Two LRP categories do, however, have direct relevance to dairy operations: LRP-Fed Cattle covers cull dairy cows under its dairy cull cow provisions, and LRP-Feeder Cattle covers unborn calves and beef-on-dairy crossbred calves expected to be sold within two weeks of birth. Producers selling cull cows or beef-on-dairy calves may want to discuss these LRP options with their crop insurance agent.

Practical Considerations for Wisconsin Producers

Several practical considerations are worth noting for Wisconsin producers evaluating LGM-Dairy.

LGM-Dairy uses the CME Class III milk futures price as its milk price reference. In the Upper Midwest Federal Order, where Wisconsin producers pool, Class III is the dominant use of milk, which means the LGM-Dairy reference price typically moves in the same direction as, and reasonably close to, the regional milk value. The producer’s actual milk check, however, depends on the order’s blend price and on the producer’s individual butterfat, protein, and other solids tests. Producers with high component tests typically receive milk checks above Class III, while producers with low component tests can receive checks below it. LGM-Dairy indemnities are calculated on the Class III futures price regardless. The program is best understood as protection against industry-wide declines in the Class III to feed margin, not as protection against an individual farm’s margin shortfall.

The program is customizable by deductible, by feed ration, and by choice of which months within the 11-month insurance period to insure. The right combination depends on the producer’s cash flow, the feed ration actually fed on the farm, and the producer’s read on market conditions at the Thursday sales period.

Because LGM-Dairy pays indemnities once at the end of the insurance period, and because premiums are due at the end of the insurance period, cash flow planning around LGM-Dairy coverage differs from programs where payments flow monthly. Producers and their lenders should treat the premium obligation as a known future cash outflow when building annual budgets.

Crop insurance agents must be certified to sell LGM-Dairy. A producer interested in the program should work with an approved agent who is familiar with both the sign-up mechanics and the feed ration conversion process.

Conclusion

LGM-Dairy provides federally subsidized insurance against a decline in the expected gross margin between milk revenue and feed cost. It is available to any size dairy, is sold weekly, uses CME Class III milk and feed futures as its pricing basis, and allows significant customization by deductible, feed ration, and insurance month. The 2026 and succeeding crop year rule changes alter several administrative provisions without changing the core insurance design.

For Wisconsin producers, LGM-Dairy is one of several tools available for managing margin risk. The right choice between LGM-Dairy, DMC, and DRP depends on a producer’s cost structure, risk tolerance, cash flow, and regional milk utilization. Producers interested in LGM-Dairy should consult an approved crop insurance agent and review current RMA materials before making coverage decisions.