Livestock Gross Margin - Swine
Apr 17, 2008
Q: What is the Livestock Gross Margin for Swine Insurance Policy?
A: The Livestock Gross Margin for Swine (LGM for Swine) Insurance Policy
provides protection against the loss of gross margin (market value of livestock
minus feed costs) on swine. The indemnity at the end of the 6-month insurance
period is the difference, if positive, between the gross margin guarantee and the
actual gross margin. The LGM for Swine 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 Swine Insurance Policy?
A: Any producer who owns swine 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 Swine insurance coverage.
Q: What swine are eligible for coverage under the LGM for Swine Insurance
Policy?
A: Only swine 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 Swine Insurance Policy.
Q: What are some of the key features of the LGM for Swine Insurance Policy?
A: LGM for Swine has two advantages features.
Producers can sign up for LGM for Swine twelve times per year and insure all of
the swine they expect to market over a rolling 6-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 Swine 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 Swine different from traditional options?
A: LGM for Swine is different from traditional options in that LGM for Swine is a
bundled option that covers the cost of feed. This bundle of options effectively
insures the producer’s gross margin (swine price minus feed costs) over the
insurance period.
Q: Can LGM for Swine be exercised?
A: No. LGM for Swine 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 Swine 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 Swine use the price the producer actually receives at the
market?
A: No. The prices for LGM for Swine 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 Swine make early indemnity payments?
A: Yes. If an indemnity is due under LGM for Swine 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 Swine distributed?
A: LGM for Swine 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 Swine 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 Swine sold and how long do the sales periods last?
A: LGM for Swine is sold on the second to 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 Swine
will not be offered for sale for that insurance period.
Q: How are the feed equations for LGM for Swine determined?
A: The feed equations for LGM for Swine are based on an optimal feeding ration
developed through Iowa State University.
Q: What is the yield factor?
A: The yield factor converts lean hog
set at 0.74 for LGM for Swine.
Q: What types of losses are covered by LGM for Swine?
A: LGM for Swine covers the difference between the gross margin guarantee and
the actual gross margin. LGM for Swine does not insure against death loss or
any other loss or damage to the producer’s swine.
Q: Where can I purchase LGM for Swine coverage?
A: LGM for Swine 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 Swine 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 6 months. For the first month of any insurance period, no swine
can be insured. Coverage begins on your swine 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 30 sales closing date contains the months of
February (swine not insurable), March, April, May, June, and July.
Q: What are the producer’s target marketings?
A: A determination made by the insured as to the maximum number of slaughterready
swine 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 swine
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 swine operation for the 6-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 three trading days prior to the last
trading day 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 27, 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 three trading days prior to the last trading day 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 30, 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 30
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 three trading days prior to the last trading day in
March plus the April Nebraska corn basis. See the LGM for Swine 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 soybean meal price?
A: The expected soybean meal price is set in three different ways, depending on the
insurance period and the lags used for the feed prices. For feed months with
unexpired futures contracts, the expected soybean meal price is the simple
average of daily settlement prices for the CBOT soybean meal futures contract
for that month expressed in dollars per ton over the three business days prior to
the last trading day of the month. For feed months with expired futures contracts
(example: the December soybean meal price for the LGM insurance policies sold
in January), the expected soybean meal price is the simple average of daily
settlement prices for the CBOT soybean meal futures contract for that month
expressed in dollars per ton in the last three trading days prior to contract
expiration. For feed months without futures contracts, the expected soybean
meal price is the weighted average of the expected soybean meal prices for
surrounding contract months where the weights are based on the time difference
between the feed month and the contract months. See the LGM for Swine
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 depends on the type of operation. For farrow-to-finish
operations, the expected cost of feed equals 13.86 bushels times the expected
corn price plus 196.16 pounds divided by 2000 pounds per ton times the
expected soybean meal price. For finishing feeder operations, the expected
cost of feed equals 9.6 bushels times the expected corn price plus 132 pounds
divided by 2000 pounds per ton times the expected soybean meal price. For
finishing SEW operations, the expected cost of feed equals 9.7 bushels times the
expected corn price plus 142 pounds divided by 2000 pounds per ton times the
expected soybean meal price.
Q: What is the expected swine price?
A: Expected swine prices for months in an insurance period are determined using
three-day average settlement prices on CME lean hog futures contracts and a
basis adjustment that varies by month and state. For swine months with
unexpired futures contracts, the expected swine price is the simple average of
the CME lean hog futures contract for that month over the three trading days
prior to the last trading day in the month of the sales closing date expressed in
dollars per hundredweight plus the state-specific swine basis for that month. For
example, for a sales closing date of February 27, the expected swine price for
July in Missouri equals the simple average of the daily settlement prices on the
CME July lean hog futures contract over the three trading days prior to the last
trading day in February plus the July Missouri swine basis. For swine months
without a futures contract, the futures prices used to calculate the expected
swine price are the weighted average of the futures prices used in calculating the
expected swine 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 swine month and the contract months. For example, for
the March 30 sales closing date, the expected swine price for September in
Missouri equals one-half times the simple average of the daily settlement prices
on the CME August lean hog futures contract over the three trading days prior to
the last trading day in March plus one-half times the simple average of the daily
settlement prices on the CME October lean hog futures contract for the three
trading days prior to the last trading day in March plus the September Missouri
swine basis. See the LGM for Swine 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 swine?
A: The expected gross margin per swine in a month for a particular state for a
farrow-to-finish operation is the Expected Swine Price for the state and for the
month the swine are marketed times the assumed weight of the swine at
marketing (2.5 cwt.) times the yield factor (0.74) to convert the price to a live
weight basis, minus the Expected Cost of Feed for the state and the month three
months prior to the month the swine are marketed.
Expected gross margin per swine for a farrow-to-finish operation =
(0.74 * 2.5 * Swinet) – (13.86 * Cornt-3) - ((196.16/2000) * Soybean Mealt-3).
The expected gross margin per swine in a month for a particular state for a
finishing feeder operation is the Expected Swine Price for the state and for the
month the swine are marketed times the assumed weight of the swine at
marketing (2.5 cwt.) times the yield factor (0.74) to convert the price to a live
weight basis, minus the Expected Cost of Feed for the state and the month two
months prior to the month the swine are marketed.
Expected gross margin per swine for a finishing feeder operation =
(0.74 * 2.5 * Swinet) – (9.6 * Cornt-2) - ((132/2000) * Soybean Mealt-2).
The expected gross margin per swine in a month for a particular state for a
finishing SEW operation is the Expected Swine Price for the state and for the
month the swine are marketed times the assumed weight of the swine at
marketing (2.5 cwt.) times the yield factor (0.74) to convert the price to a live
weight basis, minus the Expected Cost of Feed for the state and the month two
months prior to the month the swine are marketed.
Expected gross margin per swine for a finishing SEW operation =
(0.74 * 2.5 * Swinet) – (9.7 * Cornt-2) - ((142/2000) * Soybean Mealt-2).
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 swine for each month of an insurance period. If the
producer from the above example has 10 swine to sell in June and an expected
gross margin per head of $55, the expected total gross margin would be $550
(10 x $55 = $550).
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 swine to be marketed
from the expected total gross margin for the applicable insurance period. If our
example producer has a $10 per head deductible, the gross margin guarantee
equals $450 [$550 – (10 x $10)].
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 soybean meal price?
A: For months in which a CBOT soybean meal futures contract expires, the actual
soybean meal 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 soybean
meal futures contract for that month expressed in dollars per bushel. For months
when there is no expiring CBOT soybean meal futures contract, the actual
soybean meal price is the weighted average of the futures prices on the nearest
two contract months. The weights depend on the time period between the month
in question and the nearby contract months. For example, the actual soybean
meal 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 soybean meal 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 soybean meal futures contracts that expire in May.
Q: What is the actual cost of feed?
A: The actual cost of feed depends on the type of operation. For farrow-to-finish
operations, the actual cost of feed equals 13.86 bushels times the actual corn
price plus 196.16 pounds divided by 2000 pounds per ton times the actual
soybean meal price. For finishing feeder operations, the actual cost of feed
equals 9.6 bushels times the actual corn price plus 132 pounds divided by 2000
pounds per ton times the actual soybean meal price. For finishing SEW
operations, the actual cost of feed equals 9.7 bushels times the Actual Corn
Price plus 142 pounds divided by 2000 pounds per ton times the Actual Soybean
Meal Price.
Q: What is the actual swine price?
A: For months in which a CME lean hog futures contract expires, the actual swine
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 lean hog futures contracts
plus the state-specific swine basis for that month. For other months the actual
swine price is the simple average the daily settlement prices in the last three
trading days prior to the contract expiration date of the lean hogs futures
contracts that expire in the surrounding months. For example, the actual swine
price in September is the simple average of the daily settlement prices in the last
three trading days prior to the contract expiration date of the lean hog futures
contracts that expire in August and October.
Q: What is the actual gross margin per swine?
A: The actual gross margin per swine in a month for a particular state for a farrowto-
finish operation is the Actual Swine Price for the state and for the month the
swine are marketed times the assumed weight of the swine at marketing (2.5
cwt.) times the yield factor (0.74) to convert the price to a live weight basis, minus
the Actual Cost of Feed for the state and the month three months prior to the
month the swine are marketed.
Actual gross margin per swine for a farrow-to-finish operation =
(0.74 * 2.5 * Swinet) – (13.86 * Cornt-3) - ((196.16/2000) * Soybean Mealt-3).
The actual gross margin per swine in a month for a particular state for a finishing
feeder operation is the Actual Swine Price for the state and for the month the
swine are marketed times the assumed weight of the swine at marketing (2.5
cwt.) times the yield factor (0.74) to convert the price to a live weight basis, minus
the Actual Cost of Feed for the state and the month two months prior to the
month the swine are marketed.
Actual gross margin per swine for a finishing feeder operation =
0.74 * 2.5 * Swinet) – (9.6 * Cornt-2) - ((132/2000) * Soybean Mealt-2).
The actual gross margin per swine in a month for a particular state for
SEW operation is the Actual Swine Price for the state and for the month
swine are marketed times the assumed weight of the swine at marketing
cwt.) times the yield factor (0.74) to convert the price to a live weight basis,
the Actual Cost of Feed for the state and the month two months prior
month the swine are marketed.
Actual gross margin per swine for a finishing SEW operation =
0.74 * 2.5 * Swinet) – (9.7 * Cornt-2) - ((142/2000) * Soybean Mealt-2).
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 swine for each month of an insurance period. If the
producer in the example sold 10 head of swine in June and had an actual gross
margin per head of swine of $40, the actual total gross margin would be $400 (10
x $40 = $400).
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 $50 ($450 - $400 = $50).
Q: 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 next 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 swine 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 swine 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 30 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 Swine 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 6 months after the sales closing date. For
example, for the January 30 sales closing date, coverage ends on July 31.
Q: What deductibles are available for the policy?
A: The producer may select deductibles from $0 to $20 per head of swine, in $2 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 swine 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 Swine 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 swine will be insured under the LGM for
Swine policy?
A: A producer can insure any amount of swine that the producer owns up to a limit
of 15,000 head for any 6-month insurance period and a limit of 30,000 head per
crop year. Ownership of insured swine 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 Swine Insurance Policy?
A: The application for the LGM for Swine 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 farrow-to-finish, feeder finishing, and
SEW 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
three types of swine. However, the producer is still limited to covering 15,000
head per insurance period and 30,000 annually.
Q: Can LGM sales be suspended?
A: Yes. Sales of LGM for Swine 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 lean hog 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 Swine program. In these cases, coverage will no longer be offered for sale on
the RMA Web site. LGM for Swine 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 next to last business day of the month?
A: LGM for Swine will not be available for sale for that insurance period.
For more information, please contact Leiann Nelson.
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