Livestock Gross Margin LGM for Dairy

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Livestock Gross Margin (LGM) for Dairy

• Karen B. Bodley
• ASA Regional Sales Rep.
• Katie Rossini
• Director, Risk Management and Analysis

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LGM for Dairy
Federal Crop Insurance Corporation
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What is LGM for Dairy?

• Insurance program
• Protects the gross margin between milk price and
  feed cost
• Written and reinsured by the Federal Government
  (Risk Management Agency)

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What do you need to participate?

• Determine amount of milk to insure per month
• Determine amount of feed used to produce the
  amount of insured milk
• Determine months to insure

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What LGM is not

• It Does Not
• Insure against death of cattle
• Loss for unexpected decrease in milk production
• Unexpected increases in feed use
• This product does not affect any other crop
  insurance product you may currently purchase

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Enrollment Period

• Insurance can be purchased monthly
• Coverage can be for one month
• Coverage can be up to 10 months
• Coverage will attach one full month following the
  offering date
• Book on August 27th, coverage begins October 1st
• Coverage is offered on the third to last business
  day of each month

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Enrollment Example
X Enrollment Month - Coverage Period
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Insurance Limits

• There is no minimum number of hundredweights that
  a producer can insure
• The maximum amount of milk that can be insured
  is
• 24,000,000 lbs (240,000 cwt) per insurance period

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What are your responsibilities?

• Keep accurate feed records (purchases and field
  grown)
• Keep accurate records/reports of milk produced
  each month
• If at this time you are unable to keep accurate
  records please talk to one of us and we can help
  you set up a system that will work for you and
  your farm

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What are acceptable feed records?

• Farm Management Records
• Ledger Sheets
• Bin Measurements
• Field Harvest Records
• Precision farming and yield Monitoring systems.
• Livestock Feeding Records
• Verifiable receipts of purchase for feed

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How do I apply for insurance?

• Application and target marketing report
• Marketing report
• Transfer of right to an indemnity
• Sample forms have been provided in your packets

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Target Marketing

• Milk
• A producer determines milk in cwt that they wish
  to insure up to a max of 100 of total
  production
• Feed
• Convert energy and protein of current ration to
  feed equivalent of corn and soybean meal
• Only for insured milk quantity

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Expected Prices

• Chicago Board of Trade futures prices are used
  for corn and soybean meal
• Chicago Mercantile Exchange futures prices are
  used for milk

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Expected Pries - Example

• To calculate LGM coverage for July 09
• July 09 corn futures price on the CBOT
• July 09 soybean meal futures price on the CBOT
• July 09 milk futures price on the CME

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Basis

• Basis Difference between the state price and
  the CBOT/CME price for a given commodity
• Predetermined for crop year
• NASS Data (National Agricultural Statistic
  Survey)
• Does not impact your typical basis
• Additional components, PPD, premiums

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Cost

• Premiums
• Determined monthly
• High price volatility high premiums
• Insure more months together pay lower premiums
• Deductibles
• Increase deductible decrease premium
• Range from 0 to 1.50/cwt in 0.10 increments

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Premium Quotes

• Obtaining a Quote
• Prior to the sales day (3rd to last business day
  of the month), quotes run off of the previous
  months prices
• Actual quotes can only be given on the actual
  sales day

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LGM for Dairy Quote

• Scenario
• ABC Dairy would like to purchase an 11-month
  LGM policy
• They would like to book 200,000 lbs (2,000 cwt)
  of milk per month
• Their corn equivalent is 13 tons per month and
  soybean meal equivalent is 7.5 tons per month
• They would like a quote with a 1.00 deductible
  and one with out a deductible

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Quote

• Sales Closing Date August 27, 2008
• Coverage Begins October 1, 2008
• Coverage Ends July 31,2009

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Quote Comparison

• Farmer A decided to book milk for October
• Milk booked was 200,000 lb, (2,000 cwt) corn fed
  was 25 tons, and soybean meal was 7.8 tons
• Farmer B decides in August that he wants to
  insure10 months using the same cwt of milk and
  feed from above

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Quote Comparison
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Approval

• Insurance application must be accepted by USDA
  (RMA Risk Management Agency) prior to coverage
  attaching
• If program capacity is reached
• You may not be able to get coverage
• Your coverage quantity may be decreased

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Losses

• At the end of the producers marketing plan they
  will receive a notice of probable loss
• The end of your marketing plan is the last
  month in which you choose to insure your milk
• Producer must file a new marketing plan within 15
  days of notice to receive an indemnity payment
• Sample of Notice of Probable loss located in
  packet

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Getting StartedExamples
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Step 1 Insurance Period

• Enrollment
• Monthly
• 3rd to last business day of every month
• Multi-month, or individual months
• Can cover as little as one month
• Can cover up to 10 months per enrollment

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Step 2a Target Marketing

• Milk
• Up to 100 of expected production
• Insures milk that is produced
• No minimum
• Up to 24,000,000 pounds per crop year

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Step 2b Target Marketing

• Feed
• Corn Equivalent
• Soybean Meal Equivalent
• Convert current ration into corn and soybean meal
  equivalents
• Must be within a range for the amount of milk you
  are insuring

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Step 3 - Deductible

• Deductible
• 0 - 1.50/cwt
• 0.10 increments
• Increase deductible decrease premium

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Step 4 - Apply

• Fill out necessary paperwork
• Target Marketings
• Milk Feed

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Step 5 - Indemnity

• To Collect your Applicable Indemnity
• You will receive a notice at the end of your
  insurance period
• You must return paperwork within 15 days of
  notice to claim any indemnity

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EXAMPLES
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LGM-Dairy Example

• August 27th enrollment
• 3-month coverage
• 0 deductible
• Coverage for 200,000 lbs/mo (2,000 cwt) (100 of
  anticipated production)
• Feed target marketings?

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LGM-Dairy Example

• Feed
• Marketing for 200,000 lbs of monthly milk
  production
• Can use suggested feed conversion rate
• Must be within USDA specified range

• Example Feeding 2 tons of whole cottonseed

• Soybean Meal Equivalent 2 tons X 0.323 0.646
  tons
• Corn Equivalent 2 tons X 0.850 1.700 tons

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LGM-Dairy Example

• Total Feed Equivalent
• 7.5 tons of Soybean meal
• 893 bushels of Corn (25 tons)
• Milk Production
• 200,000 lb per month

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LGM Example 1

• Enrollment August 27, 2008
• Milk 200,000 lb/month (2,000 cwt)
• Corn 893 bu/month (25 tons)
• Soybean Meal 7.5 ton/month
• Insurance Period Oct Dec 2008

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LGM Example 1
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LGM Example 1a

• Enrollment November 25, 2008
• Milk 100,000 lb/mo (1,000 cwt/mo)
• Corn 445 bu/month (12.5 tons)
• Soybean Meal 3.8 ton/month
• Insurance Period Jan - Apr 2009

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LGM Example 1a
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LGM Example 2

• Enrollment August 27, 2008
• Milk 200,000 lb/mo (2,000 cwt/mo)
• Corn 893 bu/month (25 tons)
• Soybean Meal 7.5 ton/month
• Insurance Period Oct Dec 2008
• Deductible 1.00/cwt

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LGM Example 2
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LGM Example 2 Settle 1
Actual Margin greater than Gross Margin Guarantee
NO INDEMNITY
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LGM Example 2 Settle 2
Actual Margin Less than Gross Margin Guarantee
INDEMNITY PAID 19,535 or 3.26/cwt
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Example Farm Use
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LGM-Dairy Overview

• Benefits
• Protects the margin!
• Variable size
• Variable terms
• Deductible
• Monthly enrollment options
• Compliments current RMS programs

• Difficulties
• Short enrollment period
• Relative to your state not your farm
• Limited capacity
• Can create cash flow issue

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LGM RMS
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Fixed Price Forward Contract
Average Pay Price
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Fixed Price Contract with Upside Rider
0.50/cwt Premium
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16.00 Minimum Price Contract
0.40 Premium
Minimum Price
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Fence Contract with18.00 Floor, 23.00 Ceiling
Maximum Potential
Fee 0.26
Minimum Price
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LGM RMS

• October December Contract
• Same Pounds

• LGM
• Margin Protection
• Upside Potential
• Settles on average
• Book once/month
• 1.50 Deductible
• 0.65 premium

• Minimum Price Contract
• Milk Protection
• Upside Potential
• Settles monthly
• Book daily
• Priced 1.50 below market
• 0.50 premium

• Fixed Price Contract
• Milk Protection
• NO upside potential
• Settles monthly
• Book daily
• Priced at market
• 0.09 premium

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Contacts

• Karen Bodley
• Regional Sales Rep.
• 866-297-7729 Ext. 5635
• Cell 315-440-5869
• Email Karen.bodley_at_agriservicesagency.com

Katie Rossini Director Risk Management
Analysis 866-297-7729 Ext. 5581 EmailKatie.rossin
i_at_dairylea.com
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Contacts

• Amanda Carosella
• Customer Service Rep.
• 866-297-7729 Ext. 5522
• Email Amanda.carosella_at_agriservicesagency.com
• Steve Lewis
• Gannon Associates Workers Comp Crop
• Insurance specialist
• 800-654-8840
• Email slewis_at_gannonassociates.com
• Sean Beirne
• Gannon Associates
• AG Marketing Manager
• 800-654-8840
• Email sbeirne_at_gannonassociates.com

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Questions?

• Thank you!

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Handouts
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Farm Example
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Farm Example
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Extra Slides
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Increase or Decrease in Production?

• Cannot claim indemnity on more than 100 of your
  target marketings
• If actual marketings are less than 75 of the
  target marketings - coverage will adjust
  proportionately
• Anything between 75 - 100 will be 100 covered

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Feed Ration Changes?

• Only covering protein and energy equivalent for
  pounds of milk
• How much energy and protein are required for 1
  pound of milk?
• For the most part, it doesnt change
• Have better feed produce more milk, but still
  the same amount of protein and energy per pound
  of milk
• Settles to CBOT and CME prices
• Not your farm price

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The LGM Cycle
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LGM-Dairy Eligible States
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Pennsylvania Basis
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Vermont Basis
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New York Basis
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Maryland Basis
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Massachusetts Basis
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LGM-Dairy Ration Calculator
Converts to 426 bushels of corn
12 tons of soybean meal
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Possible Outcomes

• Increase or Steady Margin NO PAYMENTS
• Milk Price ? Feed Cost ?
• Milk Price ? Feed Cost ?
• Milk Price ? Feed Cost ?
• Decreased Margin PAYMENTS
• Milk Price ? Feed Cost ?
• Milk Price ? Feed Cost ?
• Milk Price ? Feed Cost ?

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Pounds of Milk Booked
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Pounds by Contract Type (2008)
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Expected Milk Price October 2008
Milk Value
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Expected Feed Value October 2008
Feed Value
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Expected Margin October 2008
Gross Margin Guarantee
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Example

• Gross Margin Guarantee at 14,125
• Indemnity paid only when actual margin decreases
• Indemnity Gross margin guarantee - Actual
  margin

Milk Price ? and Feed Price? Gross Margin
Guarantee 14,125 Actual Margin
13,545 Indemnity
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