Livestock Gross Margin LGM A New Risk Management Option for Dairy Producers

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Livestock Gross Margin (LGM) A New Risk
Management Option for Dairy Producers
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What is LGM for Dairy?

• Milk Margin insurance
• Protects gross margin between milk price and feed
  cost
• Protects against unexpected declines in gross
  margins on targeted milk quantities

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How LGM works

• Producer estimates quantities of milk and feed
  for a selected time period
• Purchases from 1-10 months
• Claim is paid when actual is less than projected
  DGM
• Tied directly CBOT and CME Prices (CME Group)

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Details - LGM for Dairy

• Advantages
• Allows upside gains
• Any farm size can use
• Do not have to worry about protecting the low on
  milk and upside on corn and soybean
• Feed based on
• Margin is based on concentrates of TMR and Milk

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Steps for the LGM for Dairy Process
Determine Length Months of Policy Desired
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Determine the Projected amount of milk marketed
(and prices) and projected feed to be utilized
(with price conversions to soybean/corn
equivalents.)
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Calculate projected/guarantee gross margins
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Complete Application and check on the 3rd to
last business day of the month.
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Calculate actual gross margins
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Calculate Indemnity(Projected/Guaranteed Gross
Margin Actual Gross Margin)
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If actual gross margin is less than
Guaranteed Gross Margin, anindemnity is paid
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If an indemnity is due, notice of Probable Loss
will be sent to the producer. Within 15 business
days, the producer must complete and submit
paperwork and marketing information to receive
the claim payment.
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Pricing Example for 100 Cows with 23,000 lbs. for
1 Month
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Pricing Example for 100 Cows with 23,000 lbs. for
11 Month
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Pricing Example for 100 Cows with 23,000 lbs. for
Oct 07 July 08
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Target Margins vs. Expected Margins for Oct 07
July 08 Example
40,543
29,532
18,509
7,513
29,767
22,213
14,660
7,107
Gross Margins
Deductible/cwt
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Expected Corn Price

• 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 Kansas
  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
  Kansas 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.

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Important Websites

• Calculator
• www.rma.usda.gov/tools/premcalc.html
• Livestock Margins
• www3.rma.usda.gov/apps/livestock_reports/

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LGM-Dairy Overview

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

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

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Coming Events

• Conference Calls
• 11-4-08 Dr. Ken Bailey (1-2)
• 11-12-08 Jonah Bowles (11-Noon)
• 12-11-08 Bob Wellington (11-Noon)
• 1-8-09 Katie Rossini (11-Noon)
• Profitability Forums
• 11-18-08 and 11-19-08

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Coming Events

• DART
• 10-22-08 Mechanicsburg
• 10-29-08 Bedford
• 10-30-08 Meadville

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Contact Information

• Center for Dairy Excellence
• J. Willard Lemaster
• Dairy Risk Management Specialist
• 717-756-1534
• c-WLemaste_at_state.pa.us
• www.centerfordairyexcellence.org