LGM for Dairy – How Do You Calculate the Cost of the Premium?

Published on: 12:10PM Feb 18, 2011

Here are online links and instructions to help you estimate your premium quote for this risk management plan.
Marv Portrait 4

By Marv Carlson, Dairy Gross Margin, LLC

Nearly the first question milk producers ask me is, “How much does it cost?”

Well, I really can’t tell you until the last business Friday of the month when USDA’s Risk Management Agency (RMA) posts the prices for milk, corn and soybean meal, but I can give you an estimated quote based on the last three business days.

As agents licensed to sell Livestock Gross Margin (LGM), we do not know how much the premium costs until the last business Friday or sales day for LGM.  That’s because LGM for Dairy’s premium is based off the volatility from the three day averages of Wednesday, Thursday and Friday’s closing CME market commodity prices. The premium quote is available after the computations have been completed.

How do you or I obtain an estimated quote? We have set up a link to access the premium estimator at www.dairygrossmargin.com. Click on “premium estimator.”

For those who would like more background information before going to the premium calculator; go to http://future.aae.wisc.edu. This is the homepage of the University of Wisconsin Dairy Marketing and Risk Management Program and is maintained by Professor Brian W. Gould of the Department of Agriculture and Applied Economics.

Find and Click on “LGM-Dairy.” From there, click on “Supporting Software.” LGM – Dairy Analyzer (V 2.0) is the software to run for premium estimator quotes leading into sales day. I suggest that you view the “Tutorial Video.” After clicking to go to the “Analyzer,” read the Documentation page. Click on the Premium Estimator link and peruse the site to see what all it includes.

To run a premium estimation calculation for your operation, put in the hundredweights of milk you produce each month.  Select the year, month and deductible.  Enter the hundredweights of milk and amounts of corn and soybean meal in tons you wish to include. If you want to do this faster, just enter tons of milk, then click “lowest allowed” at the top.  At this point, you have a defined  Monthly Gross Margin.

To see what the preliminary premium will be, click on “Calculate LGM Premium” at the bottom. Then expand this result by clicking “Show per cwt Results.” The third-to-last column on the right will show you the “Net Premium per cwt. of Covered Milk” in $/cwt.  Your premium cost will be determined by the deductible you choose to insure and the hundredweights of milk you want to include using LGM for Dairy as part of your risk management plan.

Take special note and read closely. The original amount of feed you enter does not change in the yellow boxes as you change the percentage of milk and feed you wish to include in your calculation. The amounts are changing live as you enter monthly changes.  Read the fine print to see the new milk and feed amounts for your preliminary estimate sample.

I like to print out the three most likely Premium Estimator calculations and then circle the changes for a quick refresher when making further analysis of the runs.

Final premium quotes will be available from a Crop Insurance Agent who sells LGM, or if you want to check for yourself, see “RMA’s Premium Calculator.” A link to this is available on Dr. Gould’s site.

One final note: USDA/RMA has publicly said the LGM products (LGM-Dairy included) have a $20 million allocation. About $12 million has been used. The largest amount has gone to pay subsidies for LGM-Dairy. Officials said, at the current rate, the $20 million could be gone before June 30, 2011. Starting in July, an additional $20 million would be put in place.

The sales pace in February will give us a better idea of how fast the money will be depleted. USDA/RMA said when the funds are gone, sales will stop until new funds are available on July 1, 2011.

The next sales day opportunity is Feb. 25, 2011. The March sales date is March 25, 2011.

Marv Carlson is with Dairy Gross Margin, LLC, in Sioux Rapids, Iowa. Contact him at [email protected] or (712) 240-8395. Visit the firm’s website for more information: www.dairygrossmargin.com.