Livestock Gross Margin - Cattle
Apr 17, 2008
Q: What is the Livestock Gross Margin for Cattle Insurance Policy?
A: The Livestock Gross Margin for Cattle (LGM for Cattle) Insurance Policy provides
protection against the loss of gross margin (market value of livestock minus
feeder cattle and feed costs) on cattle. The indemnity at the end of the 11-month
insurance period is the difference, if positive, between the gross margin
guarantee and the actual gross margin. The LGM for Cattle Insurance Policy
uses adjusted futures prices to determine the expected gross margin and the
actual gross margin. Adjustments to futures prices are state- and month-specific
basis levels. The price the producer receives at the local market is not used in
these calculations.
Q: Who is eligible for the LGM for Cattle Insurance Policy?
A: Any producer who owns cattle in the states of Colorado, Illinois, Indiana, Iowa,
Kansas, Michigan, Minnesota, Missouri, Montana, Nebraska, Nevada, North
Dakota, Ohio, Oklahoma, South Dakota, Texas, Utah, West Virginia, Wisconsin
and Wyoming is eligible for LGM for Cattle insurance coverage.
Q: What cattle are eligible for coverage under the LGM for Cattle Insurance
Policy?
A: Only cattle sold for commercial or private slaughter primarily intended for human
consumption and fed in Colorado, Illinois, Indiana, Iowa, Kansas, Michigan,
Minnesota, Missouri, Montana, Nebraska, Nevada, North Dakota, Ohio,
Oklahoma, South Dakota, Texas, Utah, West Virginia, Wisconsin and Wyoming
are eligible for coverage under the LGM for Cattle Insurance Policy.
Q: What are some of the key features of the LGM for Cattle Insurance Policy?
A: LGM for Cattle has two advantages features.
Producers can sign up for LGM for Cattle twelve times per year and insure all of
the cattle they expect to market over a rolling 11-month insurance period. The
producer does not have to decide on the mix of options to purchase, the strike
price of the options, or the date of entry.
The LGM for Cattle 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 for Cattle different from traditional options?
A: LGM for Cattle is different from traditional options in that LGM for Cattle is a
bundled option that covers both the cost of feeder cattle and the cost of feed.
This bundle of options effectively insures the producer’s gross margin (cattle
price minus feeder cattle and feed costs) over the insurance period.
Q: Can LGM for Cattle be exercised?
A: No. LGM for Cattle cannot be exercised. 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 for Cattle would pay the
difference, if positive, between the gross margin guarantee and the actual gross
margin, as defined in the policy provisions.
Q: Does LGM for Cattle use the price the producer actually receives at the
market?
A: No. The prices for LGM for Cattle are based on simple averages of futures
contract daily settlement prices plus a fixed basis and are not based on the
actual prices the producer receives at the market.
Q: Does LGM for Cattle make early indemnity payments?
A: Yes. If an indemnity is due under LGM for Cattle 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 for Cattle distributed?
A: LGM for Cattle 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
for Cattle 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 Cattle sold and how long do the sales periods last?
A: LGM for Cattle is sold on the last business day of each month. The sales period
begins as soon as the Risk Management Agency (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 gross margins are not available on the RMA website, LGM for Cattle
will not be offered for sale for that insurance period.
Q: What types of losses are covered by LGM for Cattle?
A: LGM for Cattle covers the difference between the gross margin guarantee and
the actual gross margin. LGM for Cattle does not insure against death loss or
any other loss or damage to the producer’s cattle.
Q: Where can I purchase LGM for Cattle coverage?
A: LGM for Cattle 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 for Cattle and that agent’s identification number must be on file with the
Federal Crop Insurance Corporation.
Q: What makes up the insurance period?
A: There are twelve insurance periods in each calendar year. Each insurance
period runs for 11 months. For the first month of any insurance period, no cattle
can be insured. Coverage begins on your cattle one full calendar month
following the sales closing date, unless otherwise specified in the Special
Provisions, provided premium for the coverage has been paid in full. For
example, the insurance period for the January 31 sales closing date contains the
months of February (cattle not insurable), March, April, May, June, July, August,
September, October, November, and December.
Q: What are the producer’s target marketings?
A: A determination made by the insured as to the maximum number of slaughterready
cattle that the producer will market (sell) during the insurance period. The
target marketings must be less than or equal to that producer’s applicable
approved target marketings as certified by the producer.
Q: What are the producer’s approved target marketings?
A: The Producer’s Approved Target Marketings are the maximum number of cattle
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 cattle operation for the 11-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: Expected corn prices for months in an insurance period are determined using
three-day average settlement prices on CBOT corn futures contracts and a basis
adjustment that varies by month and state. For corn months with unexpired
futures contracts, the expected corn price is the simple average of the CBOT
corn futures contract for that month over the last three trading days in the month
of the sales closing date expressed in dollars per bushel plus the state-specific
corn basis for that month. For example, for a sales closing date of February 28,
the expected corn price for July in Iowa equals the simple average of the daily
settlement prices on the CBOT July corn futures contract over the last three
trading days in February plus the July Iowa corn basis. For corn months with
expired futures contracts, the expected corn price is the simple average of daily
settlement prices for the CBOT corn futures contract for that month expressed in
dollars per bushel in the last three trading days prior to contract expiration plus
the state-specific corn basis for that month. For example, for a sales closing date
of March 31, the expected corn price for March in Nebraska is the simple
average of the daily settlement prices on the CBOT March corn futures contract
over the last three trading days prior to contract expiration plus the March
Nebraska corn basis. For corn months without a futures contract, the futures
prices used to calculate the expected corn price are the weighted average of the
futures prices used in calculating the expected corn prices for the two
surrounding months that have futures contract plus the state-specific basis for
the month. The weights are based on the time difference between the corn
month and the contract months. For example, for the March 31st sales closing
date, the expected corn price for April in Nebraska equals one-half times the
simple average of the daily settlement prices on the CBOT March corn futures
contract over the last three trading days prior to contract expiration plus one-half
times the simple average of the daily settlement prices on the CBOT May corn
futures contract for the last three trading days in March plus the April Nebraska
corn basis. See the LGM for Cattle Commodity Exchange Endorsement for
additional detail on exchange prices. Prices will be released by RMA after the
markets close on the last day of the price discovery period.
Q: What is the expected feeder cattle price?
A: Expected feeder cattle prices for months in an insurance period are determined
using three-day average settlement prices on CME feeder cattle futures contracts
and a basis adjustment that varies by month, state, and type of operation. For
feeder cattle months with unexpired futures contracts, the expected feeder cattle
price is the simple average of the CME feeder cattle futures contract for that
month over the last three trading days in the month of the sales closing date
expressed in dollars per hundredweight plus the state-specific and operationspecific
feeder cattle basis for that month. For example, for a sales closing date
of February 28, the expected feeder cattle price for May in Texas for a yearling
finishing operation equals the simple average of the daily settlement prices on
the CME May feeder cattle futures contract over the last three trading days in
February plus the May Texas feeder cattle basis for a yearling. For feeder cattle
months with expired futures contracts, the expected feeder cattle price is the
simple average of daily settlement prices for the CME feeder cattle futures
contract for that month expressed in dollars per hundredweight in the last three
trading days prior to contract expiration plus the state-specific and operationspecific
feeder cattle basis for that month. For example, for a sales closing date
of April 30, the expected feeder cattle price for March in Missouri for a calf
finishing operation is the simple average of the daily settlement prices on the
CME March feeder cattle futures contract over the last three trading days prior to
contract expiration plus the March Missouri feeder cattle basis for a calf. For
feeder cattle months without a futures contract, the futures prices used to
calculate the expected feeder cattle price are the weighted average of the futures
prices used in calculating the expected feeder cattle prices for the two
surrounding months that have futures contract plus the state-specific and
operation-specific feeder cattle basis for the month. The weights are based on
the time difference between the feeder cattle month and the contract months.
For example, for the April 30 sales closing date, the expected feeder cattle price
for July in South Dakota for a calf finishing operation equals two-thirds times the
simple average of the daily settlement prices on the CME August feeder cattle
futures contract over the last three trading days in April plus one-third times the
simple average of the daily settlement prices on the CME May feeder cattle
futures contract over the last three trading days in April plus the July South
Dakota feeder cattle basis for a calf operation. See the LGM for Cattle
Commodity Exchange Endorsement for additional detail on exchange prices.
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: For yearling finishing operations, the expected cost of feed for each month
equals 57.5 bushels times the expected corn price for that month. For calf
finishing operations, the expected cost of feed for each month equals 54.5
bushels times the expected corn price for that month.
Q: What is the expected cattle price?
A: Expected cattle prices for months in an insurance period are determined using
three-day average settlement prices on CME live cattle futures contracts and a
basis adjustment that varies by month and state. Given the differences in
contract structure for CME live cattle futures contracts, only the February, April,
June, August, October, and December CME live cattle futures are used in LGM
for Cattle price calculations. For cattle months with unexpired futures contracts,
the expected cattle price is the simple average of the CME live cattle futures
contract for that month over the last three trading days in the month of the sales
closing date expressed in dollars per hundredweight plus the state-specific cattle
basis for that month. For example, for a sales closing date of February 28, the
expected cattle price for August in Missouri equals the simple average of the
daily settlement prices on the CME August live cattle futures contract over the
last three trading days in February plus the August Missouri cattle basis. For
cattle months without a futures contract, the futures prices used to calculate the
expected cattle price are the weighted average of the futures prices used in
calculating the expected cattle prices for the two surrounding months that have
futures contracts plus the state-specific basis for the month. The weights are
based on the time difference between the cattle month and the contract months.
For example, for the March 31 sales closing date, the expected cattle price for
November in Missouri equals one-half times the simple average of the daily
settlement prices on the CME October live cattle futures contract over the last
three trading days in March plus one-half times the simple average of the daily
settlement prices on the CME December live cattle futures contract for the last
three trading days in March plus the November Missouri cattle basis. See the
LGM for Cattle Commodity Exchange Endorsement for additional detail on
exchange prices. 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 head of cattle?
A: The expected gross margin per head of cattle in a month for a particular state for
a yearling finishing operation is the expected cattle price for the state and for the
month the cattle are marketed times the assumed weight of the cattle at
marketing (12.5 cwt.), minus the expected feeder cattle price for the state five
months prior to the month the cattle are marketed times the assumed weight of
the feeder animal (7.5 cwt), minus the expected cost of feed two months prior to
the month the cattle are marketed.
Expected gross margin per head of cattle for a yearling finishing operation =
(12.50 * LiveCattlet) – (7.50 * FeederCattlet-5) - (57.5 * Cornt-2).
The expected gross margin per head of cattle in a month for a particular state for
a calf finishing operation is the expected cattle price for the state and for the
month the cattle are marketed times the assumed weight of the cattle at
marketing (11.5 cwt.), minus the expected feeder cattle price for the state eight
months prior to the month the cattle are marketed times the assumed weight of
the feeder animal (5.5 cwt), minus the expected cost of feed four months prior to
the month the cattle are marketed.
Expected gross margin per head of cattle for a calf finishing operation =
(11.50 * LiveCattlet) – (5.50 * FeederCattlet-8) - (54.5 * Cornt-4).
Q: How is the expected total gross margin calculated for each insurance
period?
A: The expected total gross margin is the sum of the target marketings times the
expected gross margin per head of cattle for each month of an insurance period.
If the producer from the above example has 10 head of cattle to sell in June and
an expected gross margin per head of $125, the expected total gross margin
would be $1,250 (10 x $125 = $1,250).
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 the per head deductible times total number of cattle to be marketed
from the expected total gross margin for the applicable insurance period. If our
example producer has a $50 per head deductible, the gross margin guarantee
equals $750 [$1,250 – (10 x $50)].
Q: What is the actual corn price?
A: For months in which a CBOT corn futures contract expires, the actual corn price
is the simple average of the daily settlement prices in the last three trading days
prior to the contract expiration date for the CBOT corn futures contract for that
month expressed in dollars per bushel plus the state-specific corn basis for that
month. Note that the state-specific corn basis used to calculate actual corn
prices is the same state-specific basis used to calculate expected corn basis for
the month. For months when there is no expiring CBOT corn futures contract,
the actual corn price is the weighted average of the futures prices on the nearest
two contract months plus the state-specific corn basis for the month. The
weights depend on the time period between the month in question and the
nearby contract months. For example, the actual corn price in April in Missouri is
one-half times the simple average of the daily settlement prices in the last three
trading days prior to the contract expiration date of the corn futures contracts that
expire in March plus one-half times the daily settlement prices in the last three
trading days prior to the contract expiration date of the corn futures contracts that
expire in May plus the Missouri April corn basis.
Q: What is the actual feeder cattle price?
A: For months in which a CME feeder cattle futures contract expires, the actual
feeder cattle price is the simple average of the daily settlement prices in the last
three trading days prior to the contract expiration date, expressed in dollars per
hundredweight, plus the state-specific feeder cattle basis for that month. For
other months, the actual feeder cattle price is the simple average of the daily
settlement prices in the last three trading days prior to the contract expiration
date of the feeder cattle futures contracts that expire in the immediately
surrounding months, plus the state-specific feeder cattle basis for that month.
For example, the actual feeder cattle price in February for Texas is the simple
average of the daily settlement prices in the last three days prior to the contract
expiration date of the feeder cattle futures contracts in January and March, plus
the February feeder cattle basis for Texas.
Q: What is the actual cost of feed?
A: For yearling finishing operations, the actual cost of feed for each month equals
57.5 bushels times the actual corn price for that month, or as stated in the
Special Provisions. For calf finishing operations, the actual feed cost for each
month equals 54.5 bushels times the actual corn price for that month, or as
stated in the Special Provisions.
Q: What is the actual cattle price?
A: For the months of February, April, June, August, October, and December, the
actual cattle price is the simple average of the daily settlement prices in the last
three trading days prior to the contract expiration date for the CME live cattle
futures contracts plus the state-specific cattle basis for that month. For the
months of January, March, May, July, September, and November, the actual
cattle price is the simple average of the daily settlement prices in the last three
trading days prior to the contracts that expire in the immediately surrounding
months plus the state-specific cattle basis for that month.
Q: What is the actual gross margin per head of cattle?
A: The actual gross margin per head of cattle in a month for a particular state for a
yearling finishing operation is the actual cattle price for the state and for the
month the cattle are marketed times the assumed weight of the cattle at
marketing (12.5 cwt.), minus the actual feeder cattle price for the state five
months prior to the month the cattle are marketed times the assumed weight of
the feeder animal (7.5 cwt), minus the actual cost of feed two months prior to the
month the cattle are marketed.
The actual gross margin per head of cattle in a month for a particular state for a
yearling finishing operation is the actual cattle price for the state and for the
month the cattle are marketed times the assumed weight of the cattle at
marketing (12.5 cwt.), minus the actual feeder cattle price for the state five
months prior to the month the cattle are marketed times the assumed weight of
the feeder animal (7.5 cwt), minus the actual cost of feed two months prior to the
month the cattle are marketed.
Actual gross margin per head of cattle for a yearling finishing operation =
(12.50 * LiveCattlet) – (7.50 * FeederCattlet-5) – (57.5 * Cornt-2).
The actual gross margin per head of cattle in a month for a particular state for a
calf finishing operation is the actual cattle price for the state and for the month
the cattle are marketed times the assumed weight of the cattle at marketing (11.5
cwt.), minus the actual feeder cattle price for the state eight months prior to the
month the cattle are marketed times the assumed weight of the feeder animal
(5.5 cwt), minus the actual cost of feed four months prior to the month the cattle
are marketed.
Actual gross margin per head of cattle for a calf finishing operation =
(11.50 * LiveCattlet) – (5.50 * FeederCattlet-8 ) – (54.5 * Cornt-4).
Q: How is the actual total gross margin calculated?
A: The actual total gross margin is the sum of the target marketings times the actual
gross margin per head of cattle for each month of an insurance period. If the
producer in the example sold 10 head of cattle in June and had an actual gross
margin per head of cattle of $50, the actual total gross margin would be $500 (10
x $50 = $500).
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 $250 ($750 - $500 =
$250).
Q: Is a marketings report required and when should the company receive it?
A: Yes, in the event of a loss the producer must submit a marketings report and
sales receipts showing evidence of actual marketings. The producer must
submit the marketings 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
marketings 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 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 cattle described in the application will
not be provided unless the insurance company receives and accepts a
completed application and a target marketings report, the producer pays the
premium paid in full, and the company sends the producer a written summary of
insurance.
Q: When does coverage begin?
A: Coverage begins one month after the sales closing date. Coverage begins on
your cattle one full calendar month following the sales closing date, unless
otherwise specified in the special provisions, provided premium for the coverage
has been paid in full. For example for the January 31 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 LGM for Cattle 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 11 months after the sales closing date. For
example, for the January 31 sales closing date, coverage ends on December 31.
Q: What deductibles are available for the policy?
A: The producer may select deductibles from $0 to $150 per head of cattle, in $10
per head 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 per head of cattle based on target marketings, 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 LGM
for Cattle 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 cattle will be insured under the LGM for Cattle
policy?
A: A producer can insure any amount of cattle that the producer owns up to a limit
of 5,000 head for any 11-month insurance period and a limit of 10,000 head per
crop year. Ownership of insured cattle must be certified by the producer and
may be subject to inspection and verification by the insurance company.
Q: What information is required for acceptance of an application for the LGM
for Cattle Insurance Policy?
A: The application for the LGM for Cattle Insurance Policy must contain all the
information required by us to insure the gross margin for the animals.
Applications that do not contain all social security numbers and employer
identification numbers, as applicable (except as stated in the policy), coverage
level percent, Target Marketings Report, and any other material information
required to insure the gross margin for the animals, will not be acceptable.
Q: If a producer has a combination of yearling finishing and calf finishing
operations on the same policy, are the guarantees and the loss payments
separate?
A: Yes. Guarantees and loss payments are calculated separately for each of these
two types of cattle. However, the producer is still limited to covering 5,000 head
per insurance period and 10,000 annually.
Q: Can LGM sales be suspended?
A: Yes. Sales of LGM for Cattle may be suspended for the next sales period if
unforeseen and extraordinary events occur that interfere with the effective
functioning of the corn, feeder cattle or live cattle commodity markets. Coverage
may not be available in instances of a news report, announcement, or other
event that occurs during or after trading hours that is believed by the Secretary of
Agriculture, Manager of the RMA, or other designated RMA staff, to result in
market conditions significantly different than those used to rate the LGM for
Cattle program. In these cases, coverage will no longer be offered for sale on the
RMA Website. LGM for Cattle sales will resume, after a halting or suspension in
sales, at the discretion of the Manager of RMA.
Q: What if the expected gross margins are not posted on the RMA Web site on
the last business day of the month?
A: LGM for Cattle will not be available for sale for that insurance period.
For more information, please contact Leiann Nelson.
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