Livestock Gross Margin - Dairy
Jun 2, 2008
Q: What is the Livestock Gross Margin (LGM) for Dairy Cattle Insurance
Policy?
A: The Livestock Gross Margin for Dairy Cattle Insurance Policy provides
protection against the loss of gross margin (market value of milk minus
feed costs) on the milk produced from dairy cows. The indemnity at the
end of the eleven-month insurance period is the difference, if positive,
between the gross margin guarantee and the actual gross margin. The
Livestock Gross Margin for Dairy Cattle Insurance Policy uses futures
prices and state basis for corn, soybean meal, and milk to determine the
expected gross margin and the actual gross margin. The price the
producer receives at the local market is not used in these calculations.
Q: Who is eligible for the Livestock Gross Margin for Dairy Cattle
Insurance Policy?
A: Any producer who owns dairy cattle in Arizona, Colorado, Connecticut,
Delaware, Illinois, Indiana, Iowa, Kansas, Maine, Maryland,
Massachusetts, Michigan, Minnesota, Missouri, Montana, Nebraska,
Nevada, New Hampshire, New Jersey, New York, North Dakota, Ohio,
Oklahoma, Pennsylvania, Rhode Island, South Dakota, Texas, Utah,
Vermont, West Virginia, Wisconsin, and Wyoming is eligible for Livestock
Gross Margin for Dairy Cattle Insurance Policy coverage.
Q: What milk is eligible for coverage under the Livestock Gross Margin
for Dairy Cattle Insurance Policy?
A: Only milk sold for commercial or private sale primarily intended for final
human consumption from dairy cattle fed in any of the eligible states is
eligible for coverage under the Livestock Gross Margin for Dairy Cattle
Insurance Policy.
Q: What are the advantages of the Livestock Gross Margin (LGM)
policy over traditional options?
A: LGM has two advantages over traditional options.
Convenience. Producers can sign up for LGM 12 times per year and
insure all their milk production they expect to market over a rolling 11-month
insurance period. The producer does not have to decide on the
mix of options.
Customization. The LGM policy can be tailored to any size farm. Options
cover fixed amounts of commodities, and those amounts may be too
large to be used in the risk management portfolio of some farms.
Q: How is LGM different from traditional options?
A: LGM is different from traditional options in that LGM is a bundled option
that covers both the price of milk and feed costs. The mix of target milk
marketings per dairy cow and target feed rations are supplied by the
producer. This feature allows the producer to select feed rations and
production levels that best reflect their actual production situation. The
resulting bundle of options effectively insures the producer’s gross
margin, milk revenue minus feed costs, over the insurance period.
LGM works as a bundle of options that pay the difference, if positive,
between the value at purchase of the options and the value at the end of
a certain time period. So, LGM would pay the difference, if positive,
between the gross margin guarantee and the actual gross margin, as
defined in the policy provisions.
Q: Can LGM be exercised?
A: No, LGM cannot be exercised during the insurance period. LGM pays the
difference, if positive, between the gross margin guarantee and the actual
gross margin, as defined in the LGM provisions, at the end of the
insurance period.
Q: Does LGM use the price the producer receives at the market?
A: No. The prices for LGM are based on simple averages of futures contract
daily settlement prices and are not based on the prices the producer
receives at the market. Milk and corn prices are adjusted for statespecific
and month-specific expected basis. The same basis levels used
to adjust expected corn prices and expected milk prices are used to
adjust actual corn prices and actual milk prices.
Q: Does LGM make early indemnity payments?
A: Yes. If an indemnity is due under LGM coverage, the company will send
the producer a notice of probable loss after the last month of the
producer’s marketing plan. The last month of the producer’s marketing
plan is the last month in which the producer indicated target marketings
on the application.
Q: How is the underwriting capacity for LGM distributed?
A: LGM has limited underwriting capacity that will be distributed through the
Federal Crop Insurance Corporation’s underwriting capacity manager.
The underwriting capacity will be distributed on a first come, first served
basis. LGM will not be offered for sale after capacity is full or at any time
the underwriting capacity manager is not functional.
Q: When is LGM for Dairy Cattle sold and how long do the sales
periods last?
A: LGM for Dairy Cattle is sold on the third to last business day of each
month. The sales period begins as soon as RMA reviews the data
submitted by the developer after the close of markets on the last day of
the price discovery period. The sales period ends at 9:00 AM the
following day. If expected milk and feed prices are not available on the
RMA website, LGM will not be offered for sale for that insurance period.
Q: How are the feed quantities for LGM determined?
A: Producers must supply the total number of tons of corn or corn equivalent
and the tons of protein meal or protein meal equivalent that they expect to
feed for each month in which they insure their milk. Feed quantities are
bounded. The number of tons of corn or corn equivalent must be
between 0.00364 and 0.02912 tons per hundredweight of milk. The
number of tons of protein meal or protein meal equivalent must be
between 0.000805 and 0.006425 tons per hundredweight of milk.
Q: How can feed equivalents be determined?
A: Producers can determine the corn and soybean meal equivalents of their
feeds. The only restriction is that the feed rates must be within the
bounds listed in Question 11. The LGM-Dairy Commodity Exchange
Endorsement contains a table with suggested feed conversion rates.
Below is an example feed conversion based on the suggested rates. If a
producer fed 140 bushels of oats and 0.2 tons of meat meal, he/she
would need to convert these to corn and soybean meal equivalents.
The conversion for the oats can be done in two steps:
Step 1. Converting feed to tons.
140 bushels of oats X (32 pounds/1 bushel of oats) X (1 ton/2000
pounds) = 2.24 tons
Step 2. Using the suggested conversion rates for corn and soybean
meal equivalents.
2.24 tons of oats X 0.120 = 0.2688 tons of soybean meal
equivalents
2.24 tons of oats X 0.779 = 1.7450 tons of corn equivalents
The conversion for the meat meal can be done in one step as the meat
meal is already measured in tons:
Step 1. Using the suggested conversion rates for corn and soybean meal
equivalents.
0.2 tons of meat meal X 1.227 = 0.2454 tons of soybean meal
equivalents
0.2 tons of meat meal X -0.349 = -0.0698 tons of corn
equivalents
So the corn and soybean meal equivalents for 140 bushels of oats and
0.2 tons of meat meal are 0.5142 tons of soybean meal (0.2688 + 0.2454)
and 1.6752 tons of corn equivalent (1.7450 – 0.0698).
Feeds should be combined when creating corn and soybean meal
equivalents. Please notice that many of the protein meal feeds have
negative corn equivalent values.
Q: How are the feed costs for LGM determined?
A: Expected feed costs for a month equal the expected corn price times the
tons of corn or corn equivalent (converted to bushels) specified by the
producer for that month plus the expected soybean meal price times the
tons of protein meal or protein meal equivalent specified by the producer
for that month. Actual feed costs use actual prices for the month and the
same producer-specified quantities of feed.
Q: What types of losses are covered by LGM?
A: LGM covers the difference between the gross margin guarantee and the
actual gross margin. LGM does not insure against dairy cattle death loss,
unexpected decreases in milk production, or unexpected increases in
feed use.
Q: Where can I purchase LGM coverage?
A: LGM is available for sale at your authorized crop insurance agent’s office.
Crop insurance agents must be certified by an insurance company to sell
LGM and that agent’s identification number must be on file with the
Federal Crop Insurance Corporation.
Q: What months make up the insurance period?
A: The insurance period contains the eleven months following sales closing.
For example, the insurance period for the January 29 sales closing date
contains the months of February through December. However, coverage
begins in the second month of the insurance period, so the coverage
period for this example is the months of March through December.
Q: What are the producer’s target marketings and target feed?
A: A determination made by the insured as to the quantity of milk to be sold
and the quantity of feed to be fed for each month during the insurance
period. Target marketings must be less than or equal to that producer’s
applicable approved target marketings as certified by the producer.
Target feed must be within the bounds that are specified in the
underwriting rules.
Q: What are the producer’s approved target marketings?
A: The producer’s approved target marketings are the maximum amount of
milk that may be stated as target marketings on the application.
Approved target marketings are certified by the producer and are subject
to inspection by the insurance company. A producer’s approved target
marketings will be the lesser of the capacity of the producer’s dairy
operation for the eleven-month insurance period as determined by the
insurance provider and the underwriting capacity limit as stated in the
special provisions.
Q: What is the expected corn price?
A: For months in which a CBOT corn contract expires, the simple average of
the settlement prices for the CBOT corn futures contract for the month
during the expected price measurement period plus the state-specific
corn basis for the month. For other months, the state-specific corn basis
for the month plus the weighted average of the immediately surrounding
months’ simple average of the daily settlement prices during the expected
price measurement period. The expected price measurement period is
the three days prior to the second to last trading day of the month. (See
the commodity exchange endorsement for more information.) Prices will
be released by RMA after the markets close on the last day of the price
discovery period.
Q: What is the expected soybean meal price?
A: For months in which a Chicago Board of Trade (CBOT) soybean meal
contract expires, the expected soybean meal price is the simple average
of the daily settlement prices of the CBOT soybean meal futures contract
for the month during the expected price measurement period. For other
months, the expected soybean meal price is the weighted average of the
immediately surrounding months’ simple average of the daily settlement
prices during the expected price measurement period. No basis
adjustment is made to soybean meal prices. The expected price
measurement period is the three days prior to the second to last trading
day of the month. (See the commodity exchange endorsement for
additional information on the calculation of the expected soybean meal
price.) Prices will be released by RMA after the markets close on the last
day of the price discovery period.
Q: What is the expected cost of feed?
A: The expected cost of feed for each month equals the target corn (or corn
equivalent) to be fed times 2000/56 (to convert tons to bushels) times the
expected corn price for that month, plus the target protein meal (or protein
meal equivalent) to be fed times the expected soybean meal price for that
month. Prices will be released by RMA after the markets close on the last
day of the price discovery period.
Expected cost of feed for an operation that produces 1,560 cwt. of milk
in a month with target feed levels of 20.5 tons of corn and 6 tons of
soybean meal:
20.5 tons x (2,000/56) x Expected Corn Pricet + 6 x Expected Soybean
Meal Pricet
If the Expected Corn Price is $2.10 per bushel and the Expected Soybean
Meal Price is $150 per ton, expected feed costs would be $2,437.50
[20.5 x (2,000/56) x $2.10 + 6 x $150 = $2,437.50].
Q: What is the expected milk price?
A: The expected milk price is the simple average of the daily settlement
prices of the CME Class III milk futures contract for the month during the
expected price measurement period plus the state-specific milk basis for
the month. The expected price measurement period is the three days
prior to the second to last trading day of the month. Prices will be
released by RMA after the markets close on the last day of the price
discovery period.
Q: What is the expected gross margin per month?
A: The expected gross margin per month is the approved target marketings
times the expected milk price for that month less the expected feed costs
for that month. Extending the above example, if approved target
marketings are 1,560 cwt. of milk for a month, the expected milk price is
$12 per hundredweight, and the expected feed cost is $2,437.50, then the
Expected Gross Margin is equal to $16,282.50 [(1,560 x $12.00) –
$2,437.50 = $16,282.50].
Q: How is the expected total gross margin calculated for each
insurance period?
A: The expected total gross margin is the sum
margins for each month of an insurance period.
Q: How is the gross margin guarantee calculated for each insurance
period?
A: The gross margin guarantee for each coverage period is calculated by
subtracting a deductible amount from the expected total gross margin for
the applicable insurance period.
If our example producer wants a $0.10 deductible on each of 1,560
hundredweight of milk, then the gross margin guarantee would be
$16,126.50 [$16,282.50 – ($0.10 x 1,560) = $16,126.50].
The deductible is the portion of the expected gross margin that you elect
not to insure. Allowable deductible amounts range from zero to $1.50 per
hundredweight of milk in $0.10 per hundredweight increments.
Q: What is the actual corn price?
A: For months in which a CBOT corn contract expires, the actual corn price
is the simple average of the daily settlement prices for the CBOT corn
futures contract for the month during the actual price measurement period
plus the state-specific corn basis for the month. For other months, the
state-specific corn basis for the month plus the weighted average of the
immediately surrounding months’ simple average of the daily settlement
prices during the actual price measurement period. The actual price
measurement period is the last three trading days prior to contract
expiration. (See the commodity exchange endorsement for more
information.)
Q: What is the actual soybean meal price?
A: For months in which a CBOT soybean meal contract expires, the actual
soybean meal price is the simple average of the daily settlement prices
for the CBOT soybean meal contract for the month during the actual price
measurement period. For other months, the actual soybean meal price is
the weighted average of actual soybean meal prices in the immediately
surrounding months. The actual price measurement period is the last
three trading days prior to contract expiration. (See the commodity
exchange endorsement for more information.)
Q: What is the actual cost of feed?
A: The actual cost of feed for each month equals the target corn to be fed
times 2,000/56 (to convert tons to bushels) times the actual corn price for
that month, plus the target soybean meal to be fed times the actual
soybean meal price for that month. Calculation of the actual cost of feed
uses the same target corn and soybean meal to be fed as the expected
cost of feed. Changes in feed rations from these target amounts are not
covered under the LGM for Dairy Cattle policy.
The actual cost of feed for an operation that produces 1,560 cwt. of milk
in a month with target feed levels of 20.5 tons of corn and 6 tons of
soybean meal:
20.5 tons x (2,000/56) x Actual Corn Pricet + 6 x Actual Soybean Meal
Pricet
If the Actual Corn Price is $2.00 per bushel and the Actual Soybean Meal
Price is $175 per ton, actual feed costs would be $2,514.29
[20.5 x (2,000/56) x $2.00 + (6 x $175) = $2,514.29].
Q: What is the actual milk price?
A: The actual milk price is the simple average of the daily settlement prices
of the CME Class III milk futures contract for the month during the actual
price measurement period plus the state-specific milk basis for the month.
The actual price measurement period is the last three trading days prior
to contract expiration. (See the Commodity Exchange Endorsement for
more information.)
Q: What is the actual gross margin per month?
A: The actual gross margin per month is the actual marketings times the
actual milk price for that month less the actual feed costs for that month.
Extending the above example, if actual marketings are 1,560 cwt. of milk
for a month, the actual milk price is $10 per hundredweight, and the
actual feed cost is $2,514.29, then the actual gross margin is equal to
$13,085.71 [(1,560 x $10.00) – $2,514.29 = $13,085.71].
Q: How is the actual total gross margin calculated?
A: The actual total gross margin is the sum of the actual gross margins for
each month of an insurance period.
Q: How are indemnities determined?
A: Indemnities to be paid will equal the difference between the gross margin
guarantee and the actual total gross margin for the insurance period.
The producer in our example would receive an indemnity of $3,040.79
($16,126.50 - $13,085.71 = $3,040.79).
Q: Is a marketing report required and when should the company
receive it?
A: Yes, in the event of a loss the producer must submit a marketing report
and sales receipts showing evidence of actual marketings for each
month. The producer must submit the marketing report within 15 days of
receipt of notice of probable loss.
Q: Is this a continuous policy?
A: This is a continuous policy with twelve overlapping insurance periods per
year. Target marketings must be submitted for each insurance period. If
a target marketing report is not submitted by the sales closing date for the
applicable insurance period, target marketings for that insurance period
will be zero.
Q: When must the application for insurance be turned into the
company?
A: The sales closing dates for the policy are the third to last business day of
the month for each of the twelve calendar months. The application must
be completed and filed not later than the sales closing date of the initial
insurance period for which coverage is requested. Coverage for the milk
described in the application will not be provided unless the insurance
company receives and accepts a completed application and a target
marketing report, premium is paid in full, and the insurance company
sends the producer a written summary of insurance.
Q: When does coverage begin?
A: Coverage begins one month after the sales closing date. For example, for
the January 29 sales closing date, coverage begins on March 1.
Q: When are the contract change dates for the policy?
A: The contract change date is April 30. Any changes to the Livestock
Gross Margin policy will be made prior to this contract change date.
Q: When are the cancellation dates for the policy?
A: The cancellation date is June 30 for all insurance periods.
Q: When is the end of insurance for the policy?
A: The end of insurance for the policy is eleven months after the sales
closing date. For example for the January 29 sales closing date,
coverage ends on December 31.
Q: What deductible levels are available for the policy?
A: The producer may select deductible levels between $0 and $1.50 per
hundredweight of milk in $0.10 increments.
Q: How is the producer’s premium calculated?
A: The producer’s premium is calculated by a premium calculator program
that determines the premium based on target marketings and expected
gross margins for each period and deductibles.
Q: When is the premium for the policy due?
A: The premium for the initial insurance period is due with the application for
Livestock Gross Margin insurance coverage. The premium for all
subsequent insurance periods is due with the target marketings report,
which is due no later than the sales closing date.
Q: What portion of a producer’s milk will be insured under the policy?
A: 100 percent of a dairy farmer’s milk can be insured under the policy.
Q: What information is required for acceptance of an application for the
Livestock Gross Margin for Dairy Cattle Insurance Policy?
A: The application for the Livestock Gross Margin for Dairy Cattle Insurance
Policy must contain all the information required by us to insure the gross
margin for the livestock or livestock products. Applications that do not
contain all social security numbers and employer identification numbers,
as applicable (except as stated in the policy), deductibles, a target
marketings report, and any other material information required to insure
the gross margin for the livestock or livestock products, will not be
acceptable.
Q: Can the manager of RMA suspend LGM sales?
A: Yes. Sales of LGM may be suspended for the next sales period if
unforeseen and extraordinary events occur that interfere with the effective
functioning of the corn, soybean meal, or milk commodity markets.
Q: What if the expected milk and feed prices are not posted on the RMA
Web site on the sales closing date for the month?
A: LGM will not be available for sale for that insurance period.
For more information, please contact Bill Bing.
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