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LGM-Dairy: Potential Payout for All 10 Months

May 11, 2012

Calculating where the dairy insurance program will settle for participants.

ron mortensen photo 11 05   CopyBy Ron Mortensen, Dairy Gross Margin, LLC
 
Last month we looked the Livestock Gross Margin-Dairy (LGM) settlements.
 
For policies purchased on Nov. 18, 2011, the first three months of a policy--January, February and March--have “banked” indemnities for these months of $.25/cwt., $.84/cwt. and $1.33/cwt., respectively. Remember, if you purchased a 10-month policy, the remaining seven months will need to be calculated before your policy is settled.   
The months of April to October have not settled, but futures prices for milk, corn and soybean meal can be used calculated the potential payouts. Potential monthly payouts from April to October range from $1.33 /cwt. in April to $3.01/cwt. in July (see red circled area in chart below). The average of all 10 months would yield a potential payout of $1.74/cwt. for a zero-deductible policy. 
 
The chart below is an example of January through October. The first three months have final settlements. The next seven months’ payouts are estimated using the average of the futures values for May 4, 7 and 8.  This example uses 1,560 cwt. of milk, 20.5 tons of corn and 6 tons of soybean meal.  
 
Mortensen chart 5 9 12b
 
Premium:
  • $0 deductible  - $.75/cwt.
  • $.50 deductible - $.48/cwt.
  • $1.00 deductible - $.25/cwt.
 
Potential indemnity if all of the contracts settled as of May 8, 2012
(three settled months and seven months not yet settled): 
  • $0 deductible - $1.74/cwt.  
  • $.50 deductible - $1.24/cwt.  
  • $1.00 deductible - $.74/cwt.
 
Estimated net indemnity after premium:
  • $0 deductible  - $.99/cwt. 
  • $.50 deductible - $.76/cwt.  
  • $1.00 deductible - $.49/cwt.  
 
Values for the last seven months will change until each month is settled. The final indemnity will be based on an average of all the months. Your final premium payment will not be due until November.  In order for you to receive an indemnity, all of the months you purchased coverage on will need to be settled. If you are entitled to an indemnity, it will be first applied to your premium due. If the indemnity exceeds the premium, you will receive a check.   
 
To Learn More…
Click here for a short Powerpoint slideshow showing the steps for you to enter to review your policy or a sample policy. Just click on this website.
 
For further information, 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 premium estimator by going to www.dairygrossmargin.com and clicking on “Premium Estimator.” Dairy Gross Margin also generates historical data that can be found on our website under Dairy History.
If you need assistance in calculating your policy or an example of a policy, email Marv Carlson at marv@dairygrossmargin.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 ron@dairygrossmargin.com.
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