Livestock Gross Margin (LGM) for Dairy

1. Livestock Gross Margin (LGM) for Dairy Karen B. Bodley ASA Regional Sales Rep. & Katie Rossini Director, Risk Management and Analysis

2. LGM for Dairy Federal Crop Insurance Corporation

3. 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)

4. 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

5. 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

6. 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

7. Enrollment Example X – Enrollment Month - Coverage Period

9. 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

10. 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

11. 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

12. 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

13. 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

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

15. 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

16. 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

18. 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

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

20. 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

21. Quote Sales Closing Date: August 27, 2008 Coverage Begins: October 1, 2008 Coverage Ends: July 31,2009

22. 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

23. Quote Comparison

24. 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

25. Losses • At the end of the producer’s 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

26. Getting Started&Examples

27. 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

28. 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

29. 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

30. Step 3 - Deductible • Deductible • $0 - $1.50/cwt • $0.10 increments • Increase deductible – decrease premium

31. Step 4 - Apply • Fill out necessary paperwork • Target Marketings • Milk & Feed

32. Step 5 - Indemnity • To Collect your Applicable Indemnity • You will receive a notice at the end of yourinsurance period • You must return paperwork within 15 days of notice to claim any indemnity

33. EXAMPLES

34. 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?

35. 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 LGM-Dairy Example Soybean Meal Equivalent: 2 tons X 0.323 = 0.646 tons Corn Equivalent: 2 tons X 0.850 = 1.700 tons

37. 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

38. 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

39. LGM Example 1

40. 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

41. LGM Example 1a

42. 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

43. LGM Example 2

44. LGM Example 2 – Settle 1 Actual Margin greater than Gross Margin Guarantee – NO INDEMNITY

45. LGM Example 2 – Settle 2 Actual Margin Less than Gross Margin Guarantee – INDEMNITY PAID $19,535 or $3.26/cwt

46. Example – Farm Use

47. 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 LGM-Dairy Overview

48. LGM & RMS

49. Fixed Price Forward Contract Average Pay Price

50. Fixed Price Contract with Upside Rider $0.50/cwt Premium