Know Your Market
Livestock Gross Margin Dairy Policies Are Now in the Money
Apr 15, 2012
For policies purchased on Nov. 18, 2011, the first three months of a potential policy--January, February and March--are indicating an indemnity payment.
By Ron Mortensen, Dairy Gross Margin LLC
The Livestock Gross Margin-Dairy (LGM) policies are doing what they were designed to do. If milk prices drop and/or the price of corn and soybean meal moves higher, the LGM policy creates an indemnity payment. For policies purchased on Nov. 18, 2011, the first three months of a potential policy--January, February and March--are indicating an indemnity payment, depending on the deductible.
The Nov. 18, 2011 policies gave you the choice to cover any of the months between January 2012 and October 2012. In order to receive the premium subsidy, you would have needed to cover milk in at least two months.
It is interesting to note the USDA recently announced the first MILC payment since April 2010. The MILC payment for February is $.3896 per cwt. The Daily Dairy Report suggested MILC payments from April to July would top $1.00/cwt. The estimated MILC payment for March would be just above $.80/cwt.
On Nov. 18, the LGM policy established a Guaranteed Gross Margin. This is using a three-day average of milk, corn and soybean meal prices from the CME. The Actual Gross Margin is established after the milk is settled for each month and the corn and soybean meal are settled. The price of milk has dropped enough to trigger an indemnity for January, February and March. In the case of March, the corn did move higher increasing the indemnity payout.
An example for the Nov. 18, 2011 policy is shown below. It includes the Expected and Actual Prices and the potential indemnity payment for January, February and March.
The above example uses average corn and soybean meal. We used 1,560 cwt. of milk, 20.5 tons of corn and 6.0 tons of soybean meal. The indemnity payment for January is estimated to be $.25/cwt. if you used a zero deductible. The February payment estimate is $.84/ cwt., and the March payment estimate is $1.33/cwt. The average of the three months is $.81/cwt.
If you had just insured January, February and March with a zero deductible, the indemnity would be the $.81/cwt. times the amount of milk insured. If you insured 10 months, you will need to wait to see what the indemnities are for the next seven months. The premium cost of January, February and March with a zero deductible was $.63/cwt. A zero deductible policy for 10 months would have cost $.75/cwt, a $.50/cwt deductible the policy would have cost $.48/cwt and a policy with a $1.00 deductible would have cost $.25/cwt.
The University of Wisconsin’s Dr. Brian Gould has a website called “Understanding Dairy Markets.” It is a great source to evaluate your LGM-Dairy policy. Go to future.aae.wisc.edu and click on LGM-Dairy. You can also access the site by going to www.dairygrossmargin.com and clicking on “premium estimator.”
If you need assistance in calculating an example or your policy, email Marv Carlson at email@example.com or call 712-240-8395.
Ron Mortensen is a founder of Dairy Gross Margin, LLC, which was formed in 2006 to sell Livestock Gross Margin Insurance to dairy producers. Mortensen’s firm is now licensed in 23 states. He is also president of Advantage Agricultural Strategies, Ltd., which he founded in 1985, to provide individual risk management advice for farmers and agribusiness using futures, options and cash trading strategies. Contact him at 515-570-5265 or firstname.lastname@example.org.