lgm-dairy: a wisconsin example

LGM-Dairy: ALGM-Dairy: AWisconsin ExampleWisconsin Example

LGM-Dairy: A New Risk Management ToolLGM-Dairy: A New Risk Management Tool(Workshop Section II)(Workshop Section II)

2

Review a hypothetical dairy farm exampleReview a hypothetical dairy farm example Farm characteristicsFarm characteristics LGM-Dairy contract characteristicsLGM-Dairy contract characteristics

Overview of Overview of Behind the ScenesBehind the Scenes calculations calculations Expected milk and feed pricesExpected milk and feed prices How your premiums are determinedHow your premiums are determined

Comparison of use of options vs. LGM-DairyComparison of use of options vs. LGM-Dairy

Review premium calculation software and analysisReview premium calculation software and analysis UW LGM-Dairy premium calculatorsUW LGM-Dairy premium calculators

Overview of Workshop Section IIOverview of Workshop Section II

3

Farm characteristicsFarm characteristics 250 milk cows250 milk cows Average per cow productivity: 19,769 lbsAverage per cow productivity: 19,769 lbs

WI 200-499+ herd size category averageWI 200-499+ herd size category average

LGM-Dairy: Wisconsin ExampleLGM-Dairy: Wisconsin Example

HerdsHerds % of Herds% of Herds % of Prod.% of Prod. Avg. YieldAvg. Yield

1-291-29 1,9001,900 13.213.2 1.51.5 11,58611,586

30-4930-49 3,6003,600 25.025.0 10.010.0 16,09216,092

50-9950-99 6,1006,100 42.442.4 29.029.0 17,77817,778

100-199100-199 1,8001,800 12.512.5 18.518.5 19,31019,310

200-499200-499 750750 5.25.2 19.019.0 19,76919,769

500+500+ 250250 1.71.7 22.022.0 24,75024,750

TotalTotal 14,40014,400 100.0100.0 100.0100.0 19,30519,305

→→

4

Insurance contract purchased on February 25Insurance contract purchased on February 25 thth


Last Business

Day

InsurancePurchase

Day

3rd to lastbusiness day

5

Feb. Purchase Date Feb. Purchase Date → P→ Possible 10-Month ossible 10-Month Coverage Period: Apr. 2009 – Jan. 2010Coverage Period: Apr. 2009 – Jan. 2010 Cow productivity changes by monthCow productivity changes by month

Based on Wisconsin monthly yield profileBased on Wisconsin monthly yield profile Expected Feed UseExpected Feed Use

966 Tons Corn Equivalent966 Tons Corn Equivalent 213 Tons SBM Equivalent213 Tons SBM Equivalent

We assume producer insures 100% of expected We assume producer insures 100% of expected productionproduction


LGM-Dairy: Wisconsin ExampleLGM-Dairy: Wisconsin Example(Feb. 09 Contract)(Feb. 09 Contract)

MonthMonthProd./Cow Prod./Cow

(lbs)(lbs)Production Production

(cwt)(cwt)Corn Equiv. Corn Equiv.

(Tons)(Tons)SBM Equiv. SBM Equiv.

(Tons)(Tons)

Apr Apr `̀0909 1,6451,645 4,1134,113 95.895.8 21.121.1

May `May `0909 1,7361,736 4,3404,340 101.1101.1 22.322.3

Jun `Jun `0909 1,6751,675 4,1884,188 97.697.6 21.521.5

Jul `Jul `0909 1,6961,696 4,2404,240 98.898.8 21.821.8

Aug `Aug `0909 1,6751,675 4,1884,188 97.697.6 21.521.5

Sep `Sep `0909 1,6091,609 4,0234,023 93.793.7 20.720.7

Oct Oct `̀0909 1,6301,630 4,0754,075 94.994.9 20.920.9

Nov Nov `̀0909 1,6151,615 4,0384,038 94.194.1 20.820.8

Dec Dec `̀0909 1,6251,625 4,0634,063 94.794.7 20.920.9

Jan Jan `10`10 1,6601,660 4,1494,149 96.796.7 21.321.3

TotalTotal 16,55616,556 41,41741,417 965.0965.0 212.8212.8

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With Feb 25With Feb 25thth insurance purchase date insurance purchase date Expected Price Measurement Expected Price Measurement (EPM) period(EPM) period : :

Feb. 23Feb. 23stst, 24, 24thth and 25 and 25thth

To determine the To determine the Gross Margin GuaranteeGross Margin Guarantee at at contract sign-up we need:contract sign-up we need: Expected monthly milk and feed pricesExpected monthly milk and feed prices Producer elected deductibleProducer elected deductible

Calculation of Expected PricesCalculation of Expected Prices

8

Insurance contract purchased on February 25Insurance contract purchased on February 25 thth


PurchaseDay

3rd to lastbusiness day

Average Settle PricesOver These Days for Expected Prices

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Monthly expected prices for AprMonthly expected prices for Apr`09`09 – – JanJan `10`10 Expected Expected Wisconsin All MilkWisconsin All Milk price price

= Expected Class III prices + Wisconsin [All-= Expected Class III prices + Wisconsin [All-Milk – Class III] BasisMilk – Class III] Basis

Expected Expected Wisconsin Corn GrainWisconsin Corn Grain price price= Expected Corn prices + Wisconsin [Corn Price = Expected Corn prices + Wisconsin [Corn Price

Received – Corn Futures] Received – Corn Futures] BasisBasis

Expected Expected U.S. Soybean MealU.S. Soybean Meal prices (no local prices (no local basis)basis)

Calculation of Expected PricesCalculation of Expected Prices

10

The program uses the EPM period’s The program uses the EPM period’s Class IIIClass III futures futures settle prices to determine expected Class III pricessettle prices to determine expected Class III prices Feb. 23Feb. 23rdrd, 24, 24thth and 25 and 25thth

There are Class III futures contracts traded for each There are Class III futures contracts traded for each monthmonth

Calculation of Expected All-Milk PricesCalculation of Expected All-Milk Prices

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MonthMonth

Class III Futures Settle Price ($/cwt)Class III Futures Settle Price ($/cwt)

WI Milk WI Milk Basis Basis

($/cwt)($/cwt)[5][5]

Expected WI Expected WI All Milk All Milk

PricePrice($/cwt)($/cwt)

[6][6]Feb 23Feb 23[1][1]

Feb 24 Feb 24 [2][2]

Feb 25Feb 25[3][3]

Avg.Avg.[4][4]

Apr Apr `̀0909 10.3510.35 10.2710.27 10.2710.27 10.3010.30 1.401.40 11.7011.70

May `May `0909 10.8610.86 10.6710.67 10.6510.65 10.7310.73 1.231.23 11.9611.96

Jun `Jun `0909 11.4911.49 11.3311.33 11.2511.25 11.3611.36 1.111.11 12.4712.47

Jul `Jul `0909 12.6112.61 12.4012.40 12.3512.35 12.4512.45 1.111.11 13.5613.56

Aug `Aug `0909 13.3713.37 13.1713.17 13.1013.10 13.2113.21 1.161.16 14.3714.37

Sep `Sep `0909 13.8913.89 13.7213.72 13.6813.68 13.7613.76 1.371.37 15.1315.13

Oct Oct `̀0909 14.0514.05 13.9813.98 13.9513.95 13.9913.99 1.771.77 15.7615.76

Nov Nov `̀0909 14.4714.47 14.4014.40 14.3314.33 14.4014.40 1.911.91 16.3116.31

Dec Dec `̀0909 14.4714.47 14.3814.38 14.3414.34 14.4014.40 1.771.77 16.1716.17

Jan Jan `10`10 14.6114.61 14.5014.50 14.4514.45 14.5214.52 1.941.94 16.4616.46Note: [4] = ([1] + [2] + [3])/3 [6] = [4] + [5] [4] are rounded values

Calculation of Expected All-Milk PriceCalculation of Expected All-Milk PriceC

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With estimation of 10 expected Wisconsin All-Milk With estimation of 10 expected Wisconsin All-Milk price values one knowsprice values one knows Expected Gross Revenue (Expected Gross Revenue (EGREGR) at sign-up) at sign-up

EGREGR is the product of expected All-Milk is the product of expected All-Milk price times covered milk productionprice times covered milk production

Covered production could be less than Covered production could be less than allowable target as elected by the producerallowable target as elected by the producer

Different price and covered production each Different price and covered production each monthmonth

Calculation of Expected Gross RevenueCalculation of Expected Gross Revenue

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MonthMonth

Expected WI Expected WI All Milk PriceAll Milk Price

($/cwt)($/cwt)[1][1]

Covered Covered Marketings Marketings

(cwt)(cwt)[2][2]

Expected Expected Gross Gross

Revenue ($)Revenue ($)[3][3]

Apr Apr `̀0909 11.7011.70 4,1134,113 48,12248,122

May `May `0909 11.9611.96 4,3404,340 51,90651,906

Jun `Jun `0909 12.4712.47 4,1884,188 52,22452,224

Jul `Jul `0909 13.5613.56 4,2404,240 57,49457,494

Aug `Aug `0909 14.3714.37 4,1884,188 60,18260,182

Sep `Sep `0909 15.1315.13 4,0234,023 60,86860,868

Oct Oct `̀0909 15.7615.76 4,0754,075 64,22264,222

Nov Nov `̀0909 16.3116.31 4,0384,038 65,86065,860

Dec Dec `̀0909 16.1716.17 4,0634,063 65,69965,699

Jan Jan `10`10 16.4616.46 41494149 68,29368,293

TotalTotal 41,41741,417 594,870594,870

Note: Note: [ 1] [ 1] obtained from previous table obtained from previous table [3][3] = [1] * [2] = [1] * [2]

Calculation of Expected Gross RevenueCalculation of Expected Gross Revenue

14

Like Class III, EPM period’s futures settle prices Like Class III, EPM period’s futures settle prices used in calculation of expected corn and SBM used in calculation of expected corn and SBM prices prices Fed. 23Fed. 23rdrd, 24, 24thth and 25 and 25thth

Calculate expected prices for each month of Calculate expected prices for each month of contractcontract

Unlike Class III contracts, corn/soybean meal Unlike Class III contracts, corn/soybean meal futures contracts do not exist for every month futures contracts do not exist for every month

Calculation of Expected Feed PricesCalculation of Expected Feed Prices

15

MonthMonth

Corn Futures Settle Prices ($/bu)Corn Futures Settle Prices ($/bu)Imputed Imputed

PricePrice$/bu)$/bu)[5][5]

BasisBasis($/bu)($/bu)

[6][6]

Expected WI Expected WI Corn PriceCorn Price

($/bu)($/bu)[7][7]Nov 21Nov 21

[1][1]Nov 24 Nov 24

[2][2]Nov 25Nov 25

[3][3]AvgAvg[4][4]

Mar Mar `̀0909 3.51753.5175 3.54253.5425 3.63753.6375 3.573.57 ---------- ---------- ----------

Apr Apr `̀0909 ---------- ---------- ---------- ---------- 3.613.61 -0.11-0.11 3.503.50

May `May `0909 3.60753.6075 3.63003.6300 3.72253.7225 3.653.65 3.653.65 -0.12-0.12 3.533.53

Jun `Jun `0909 ---------- ---------- ---------- ---------- 3.703.70 -0.12-0.12 3.583.58

Jul `Jul `0909 3.70753.7075 3.72503.7250 3.82003.8200 3.753.75 3.753.75 -0.12-0.12 3.633.63

Aug `Aug `0909 ---------- ---------- ---------- ---------- 3.803.80 -0.15-0.15 3.653.65

Sep `Sep `0909 3.80003.8000 3.81503.8150 3.90753.9075 3.843.84 3.843.84 -0.11-0.11 3.733.73

Oct Oct `̀0909 ---------- ---------- ---------- ---------- 3.883.88 -0.15-0.15 3.733.73

Nov Nov `̀09 09 ---------- ---------- ---------- ---------- 3.933.93 -0.18-0.18 3.753.75

Dec Dec `̀0909 3.91503.9150 3.94253.9425 4.03754.0375 3.973.97 3.973.97 -0.22-0.22 3.753.75

Jan Jan `10`10 ---------- ---------- ---------- ---------- 4.014.01 -0.14-0.14 3.873.87

Feb Feb `10`10 ---------- ---------- ---------- ---------- ---------- ---------- ----------

Mar Mar `10`10 4.04004.0400 4.06754.0675 4.16504.1650 4.094.09 ---------- ---------- ----------Note: Note: [4][4] = ([1]+[2]+[3])/3, = ([1]+[2]+[3])/3, [5][5] = weighted average, = weighted average, [7][7] = [5]+[6] = [5]+[6]

Calculation of Expected Corn PriceCalculation of Expected Corn PriceC

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With calculated monthly expected cornWith calculated monthly expected corn Multiply each months covered corn equivalents Multiply each months covered corn equivalents

times the expected price to estimate expected times the expected price to estimate expected corn costscorn costs Covered corn equivalents is equal to total Covered corn equivalents is equal to total

corn equivalents multiplied by % of corn equivalents multiplied by % of production coveredproduction covered

Calculation of Expected Corn CostsCalculation of Expected Corn Costs

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MonthMonth

Expected WI Expected WI Corn PriceCorn Price

($/bu)($/bu)[1][1]

CoveredCoveredCorn Equiv. Corn Equiv.

(tons)(tons)[2][2]

ExpectedExpectedCorn CostCorn Cost

($)($)[3][3]

Apr Apr `̀0909 3.503.50 95.895.8 11,97511,975

May `May `0909 3.533.53 101.1101.1 12,74612,746

Jun `Jun `0909 3.583.58 97.697.6 12,47912,479

Jul `Jul `0909 3.633.63 98.898.8 12,80912,809

Aug `Aug `0909 3.653.65 97.697.6 12,72312,723

Sep `Sep `0909 3.733.73 93.793.7 12,48212,482

Oct Oct `̀0909 3.733.73 94.994.9 12,64212,642

Nov Nov `̀0909 3.753.75 94.194.1 12,60312,603

Dec Dec `̀0909 3.753.75 94.794.7 12,68312,683

Jan Jan `10`10 3.873.87 96.796.7 13,36513,365

TotalTotal 965.0965.0 126,507126,507

Calculation of Expected Corn CostCalculation of Expected Corn Cost

Note: Note: [1] [1] obtained from previous tableobtained from previous table [5][5] = = [4][4]*(2000/56)* *(2000/56)* [3][3]

18

Similar procedure is used to estimate SBM costsSimilar procedure is used to estimate SBM costs Use same EPM period to obtain SBM futures Use same EPM period to obtain SBM futures

settle pricessettle prices No basis addedNo basis added

Calculation of Expected SBM CostsCalculation of Expected SBM Costs

19

MonthMonth

Soybean Meal Futures Settle Prices ($/Ton)Soybean Meal Futures Settle Prices ($/Ton)Imputed Imputed

SBM PriceSBM Price($/ton)($/ton)

[5][5]Feb 23Feb 23[1][1]

Feb 24 Feb 24 [2][2]

Feb 25Feb 25[3][3]

Avg. Avg. [4][4]

Mar Mar `̀0909 276.30276.30 278.80278.80 272.80272.80 275.97275.97 ----------

Apr Apr `̀0909 ---------- ---------- ---------- ---------- 273.94273.94

May `May `0909 273.30273.30 275.00275.00 267.40267.40 271.94271.94 271.94271.94

Jun `Jun `0909 ---------- ---------- ---------- ---------- 271.44271.44

Jul `Jul `0909 272.80272.80 273.90273.90 266.20266.20 270.97270.97 270.97270.97

Aug `Aug `0909 270.00270.00 270.40270.40 263.10263.10 267.83267.83 267.83267.83

Sep `Sep `0909 262.10262.10 261.40261.40 254.10254.10 259.20259.20 259.20259.20

Oct Oct `̀0909 254.30254.30 252.40252.40 245.60245.60 250.77250.77 250.77250.77

Nov Nov `̀0909 ---------- ---------- ---------- ---------- 249.80249.80

Dec Dec `̀0909 252.30252.30 250.50250.50 243.70243.70 248.83248.83 248.83248.83

Jan Jan `10`10 253.30253.30 251.50251.50 244.70244.70 249.83249.83 249.83249.83Note: Note: [4][4] = ( [1] + [2] + [3] )/3 = ( [1] + [2] + [3] )/3 [5][5] = average of preceding and following = average of preceding and followingvalue of value of [4][4] if no futures contract, if no futures contract, [4][4] otherwise otherwise

Calculation of Expected SBM PriceCalculation of Expected SBM PriceC

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MonthMonth

Avg. Settle Avg. Settle PricePrice

($/Ton)($/Ton)[1][1]

SBMSBMEquiv Equiv (Ton)(Ton)

[2][2]

Expected Expected SBM Cost SBM Cost

($)($)[3][3]

Apr Apr `̀0909 273.94273.94 21.121.1 5,7805,780

May `May `0909 271.94271.94 22.322.3 6,0646,064

Jun `Jun `0909 271.44271.44 21.521.5 5,8365,836

Jul `Jul `0909 270.97270.97 21.821.8 5,9075,907

Aug `Aug `0909 267.83267.83 21.521.5 5,7585,758

Sep `Sep `0909 259.20259.20 20.720.7 5,3655,365

Oct Oct `̀0909 250.77250.77 20.920.9 5,2415,241

Nov Nov `̀0909 249.80249.80 20.820.8 5,1965,196

Dec Dec `̀0909 248.83248.83 20.920.9 5,2015,201

Jan Jan `̀1010 249.83249.83 21.321.3 5,3215,321

TotalTotal 212.8212.8 55,67055,670

Note: Note: [3][3] = = [1][1]* * [2][2]

Calculation of Expected SBM CostCalculation of Expected SBM Cost

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Expected Gross Margin = Expected Gross Margin = EGREGR –– EFCEFC

Gross Margin GuaranteeGross Margin Guarantee (GMG) (GMG) GMG = Expected GMG = Expected TotalTotal (Over Entire Contract) (Over Entire Contract)

Gross Margin – Gross Margin – [[Deductible x Deductible x TotalTotal Covered Covered

Milk MarketingsMilk Marketings]]

Calculation of Gross Margin GuaranteeCalculation of Gross Margin Guarantee

Expected Gross RevenueExpected Gross Revenue Expected Feed CostsExpected Feed Costs

22

Summary of Enrollment Data:Summary of Enrollment Data: Expected Milk and Feed PricesExpected Milk and Feed Prices

Calculated by RMA from Futures MarketCalculated by RMA from Futures Market Statement of Insured MarketingsStatement of Insured Marketings

Monthly Target MarketingsMonthly Target Marketings Desired Coverage %Desired Coverage %

Statement of Expected Feed Use Statement of Expected Feed Use Deductible ($ GMG/cwt):Deductible ($ GMG/cwt):


23

MonthMonth

Expected Expected Revenue ($)Revenue ($)

[1][1]

Expected Feed Expected Feed Costs ($)Costs ($)

[2][2]

Deductible Deductible ($)($)[3][3]

GMGGMG($)($)[4][4]

Apr Apr `̀0909 48,12248,122 17,75517,755 4,1134,113 26,25426,254

May `May `0909 51,90651,906 18,81018,810 4,3404,340 28,75728,757

Jun `Jun `0909 52,22452,224 18,31518,315 4,1884,188 29,72229,722

Jul `Jul `0909 57,49457,494 18,71618,716 4,2404,240 34,53934,539

Aug `Aug `0909 60,18260,182 18,48118,481 4,1884,188 37,51237,512

Sep `Sep `0909 60,86860,868 17,84817,848 4,0234,023 38,99738,997

Oct Oct `̀0909 64,22264,222 17,88317,883 4,0754,075 42,26442,264

Nov Nov `̀0909 65,86065,860 17,79917,799 4,0384,038 44,02344,023

Dec Dec `̀0909 65,69965,699 17,88417,884 4,0634,063 43,75243,752

Jan Jan `̀1010 68,29368,293 18,68718,687 4,1494,149 45,45745,457

TotalTotal 594,870594,870 182,177182,177 41,41741,417 371,277371,277


Note: Note: [4][4] = = [1][1] – – [2][2] – – [3][3], , $1.00 GMG/cwt deductible assumed$1.00 GMG/cwt deductible assumed

24

As noted in Section I of this workshop, there is As noted in Section I of this workshop, there is NoNo Producer Premium SubsidyProducer Premium Subsidy For each of 5,000 simulationsFor each of 5,000 simulations

RMA simulates Class III, corn grain and RMA simulates Class III, corn grain and SBM prices using data obtained from the SBM prices using data obtained from the EPMEPM periodperiod

Generate simulated total gross marginsGenerate simulated total gross margins Determine insurance payout whereDetermine insurance payout where

Insurance Payout = Max(0, Insurance Payout = Max(0, TotalTotal GMG – GMG – SimulatedSimulated TotalTotal Gross Margin Gross Margin

Guarantee)Guarantee) Premiums = Average of Simulated Payouts + 3%Premiums = Average of Simulated Payouts + 3%

Calculation of Insurance PremiumsCalculation of Insurance Premiums

25

For each simulated price scenario the simulated For each simulated price scenario the simulated prices are generated following historical correlations prices are generated following historical correlations between Class III, Corn and SBM between Class III, Corn and SBM For example, when simulating a high corn price a For example, when simulating a high corn price a

high SBM price is likely to be obtainedhigh SBM price is likely to be obtained


26

The The Understanding Dairy MarketsUnderstanding Dairy Markets website website maintains a database of 5,000 simulated price maintains a database of 5,000 simulated price scenariosscenarios Aug. 2008-Present actual RMA premium dataAug. 2008-Present actual RMA premium data Prior to Aug. 2008 we generated our own price Prior to Aug. 2008 we generated our own price

scenariosscenarios Evaluate hypothetical premiumsEvaluate hypothetical premiums Alternative market conditionsAlternative market conditions


27

USDA (RMA) Premium Calculator Website: USDA (RMA) Premium Calculator Website: http://www3.rma.usda.gov/apps/premcalc/http://www3.rma.usda.gov/apps/premcalc/

Understanding Dairy MarketsUnderstanding Dairy Markets Premium Calculator: Premium Calculator:http://future.aae.wisc.edu/lgm_dairy.html#2http://future.aae.wisc.edu/lgm_dairy.html#2

Automatically evaluate program performance with Automatically evaluate program performance with $0 - $1.50/cwt deductibles $0 - $1.50/cwt deductibles

Total and per cwt premiumsTotal and per cwt premiums Premium as % of GMGPremium as % of GMG Probability of simulated payoutsProbability of simulated payouts

We will review this software laterWe will review this software later Available for download and on your workshop CDAvailable for download and on your workshop CD


28


http://future.aae.wisc.edu/lgm_dairy.html#2http://future.aae.wisc.edu/lgm_dairy.html#2

Actualpremiumdata

29

February 2009 example:February 2009 example: Impact of increasing deductiblesImpact of increasing deductibles

PremiumsPremiums Decrease Decrease GMGGMG Decrease Decrease Premiums Decrease at a Faster Rate than Premiums Decrease at a Faster Rate than

GMGGMG Relative Decrease of the Above Depends OnRelative Decrease of the Above Depends On

Price Volatility at Sign-Up Price Volatility at Sign-Up Expected Gross Margins at Sign-UpExpected Gross Margins at Sign-Up

Payout Probability Decreases with Higher Payout Probability Decreases with Higher DeductiblesDeductibles


30

Insurance Premiums and Deductible LevelInsurance Premiums and Deductible Level(Feb. ′09 Example)(Feb. ′09 Example)

Note: % Note: % ↓ measured from $0 Deductible level↓ measured from $0 Deductible level

DeductibleDeductible GMGGMG PremiumPremium

Rate Rate ($/cwt)($/cwt)

[1][1]

TotalTotal($)($)[2][2]

TotalTotal($)($)[3][3]

$/cwt$/cwt[4][4]

% % ↓↓[4][4]

Total Total ($)($)[5][5]

Per CWT Per CWT ($)($)[6][6]

% ↓% ↓[7][7]

00 00 412,694412,694 9.969.96 ---------- 33,70033,700 0.8140.814 ----------

0.100.10 4,1424,142 408,552408,552 9.869.86 -1.00-1.00 34,56334,563 0.7620.762 -6.34-6.34

0.300.30 12,42512,425 400,269400,269 9.669.66 -3.01-3.01 27,60527,605 0.6670.667 -18.09-18.09

0.500.50 20,70920,709 391,986391,986 9.469.46 -5.02-5.02 24,00024,000 0.5790.579 -28.78-28.78

0.700.70 28,99228,992 383,702383,702 9.269.26 -7.03-7.03 20,73320,733 0.5010.501 -38.48-38.48

0.900.90 37,27537,275 375,419375,419 9.069.06 -9.03-9.03 17,79317,793 0.4300.430 -47.20-47.20

1.101.10 45,55945,559 367,135367,135 8.868.86 -11.04-11.04 15,15015,150 0.3660.366 -55.04-55.04

1.301.30 53,84253,842 358,852358,852 8.668.66 -13.05-13.05 12,80612,806 0.3090.309 -62.00-62.00

1.501.50 62,12662,126 350,569350,569 8.468.46 -15.05-15.05 10,72410,724 0.2590.259 -68.18-68.18

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Relative GMG and Insurance PremiumsRelative GMG and Insurance Premiums(Feb. ′09 Example)(Feb. ′09 Example)

GMG and Premium ($/CWT)

8.00

8.50

9.00

9.50

10.00

10.50

0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4Deductible ($/cwt)

GM

G /c

wt

0.25

0.35

0.45

0.55

0.65

0.75

0.85

Prem

/cwt

GMG/cwt ($)

Premium/cwt ($)

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Relative Premium Value and DeductibleRelative Premium Value and Deductible(Feb. ′09 Example)(Feb. ′09 Example)

Premium as % of GMG

3.00

3.75

4.50

5.25

6.00

6.75

7.50

8.25

0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4Deductible ($/cwt)

% o

f G

MG

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Actual Prices Determined as Futures ExpireActual Prices Determined as Futures Expire Average Futures Settle Prices From 1Average Futures Settle Prices From 1stst, 2, 2ndnd, and , and

33rdrd days days priorprior to last trading dayto last trading day

Actual Gross MarginActual Gross Margin (AGM) = Actual Revenue – (AGM) = Actual Revenue – Actual Feed CostsActual Feed Costs

Actual Prices: State Average Actual Prices: State Average NOTNOT Farm Price Farm Price

LGM-Dairy Actual Indemnity:LGM-Dairy Actual Indemnity: Actual Indemnity = Max[0, Actual Indemnity = Max[0, TotalTotal GMG GMG

– – TotalTotal AGM]AGM] TotalTotal Refers to Sum Over All Months Refers to Sum Over All Months

Determining Actual IndemnitiesDetermining Actual Indemnities

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As an example: July 2009 actual grain pricesAs an example: July 2009 actual grain prices By rule, corn and SBM futures stop trading on By rule, corn and SBM futures stop trading on

last business day prior to 15last business day prior to 15thth of the futures of the futures monthmonth July ‘09 corn/SBM last trading day: July 14July ‘09 corn/SBM last trading day: July 14 thth

Actual price measurement periodActual price measurement period July ‘09: July 9July ‘09: July 9thth, 10, 10thth, and 13, and 13thth


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Class III Announced

Last Class III Futures

Trading Day

Actual Class III Price Measurement Period

Corn/SBM Last

Trading Day

Actual Corn/SBM Price Measurement Period


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LGM-Dairy similar to a bundled optionLGM-Dairy similar to a bundled option

How does LGM-Dairy compare to costs of setting How does LGM-Dairy compare to costs of setting a a RevenueRevenue FloorFloor via Class III puts and Corn/SBM via Class III puts and Corn/SBM calls?calls?

For Comparison Example For Comparison Example We assume options perfectly divisibleWe assume options perfectly divisible Compare costs under variety of deductiblesCompare costs under variety of deductibles We use January 2008 dataWe use January 2008 data

Availability of actual 10-month price data Availability of actual 10-month price data

Cost Comparison of LGM-Dairy WithCost Comparison of LGM-Dairy WithOptions-Based Revenue ManagementOptions-Based Revenue Management

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MonthMonthExpected PricesExpected Prices

Class III Class III ($/cwt)($/cwt)

CornCorn($/bu)($/bu)

SBMSBM($/Ton)($/Ton)

Mar Mar `̀0808 17.0817.08 5.015.01 337.07337.07

Apr Apr `̀0808 16.4016.40 5.075.07 340.09340.09

May `May `0808 16.1716.17 5.135.13 343.10343.10

Jun `Jun `0808 16.1116.11 5.175.17 345.45345.45

Jul `Jul `0808 16.2816.28 5.215.21 347.80347.80

Aug `Aug `0808 16.4616.46 5.185.18 344.57344.57

Sep `Sep `0808 16.6216.62 5.155.15 339.37339.37

Oct Oct `̀0808 16.3816.38 5.135.13 325.10325.10

Nov Nov `̀0808 16.2116.21 5.125.12 324.80324.80

Dec Dec `̀0808 16.2016.20 5.105.10 324.50324.50

Expected prices for Jan. 2008 Expected prices for Jan. 2008 LGM-DairyLGM-Dairy purchase purchase

A Cost Comparison of LGM-Dairy WithA Cost Comparison of LGM-Dairy WithOptions-Based Revenue ManagementOptions-Based Revenue Management

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MonthMonthClass III Class III

Put Put ($/cwt)($/cwt)

Class III Class III PremiumPremium($/cwt)($/cwt)

Corn Corn CallCall

($/bu)($/bu)

Corn Call Corn Call Premium Premium

($/bu)($/bu)

SBM SBM CallCall

($/Ton)($/Ton)

SBM Call SBM Call PremiumPremium($/Ton)($/Ton)

Mar Mar `̀0808 17.0017.00 0.650.65 5.005.00 0.17750.1775 340340 11.6011.60

Apr Apr `̀0808 16.5016.50 0.840.84 5.105.10 0.32750.3275 340340 23.1023.10

May `May `0808 16.2516.25 0.920.92 5.105.10 0.32750.3275 340340 23.1023.10

Jun `Jun `0808 16.0016.00 0.900.90 5.205.20 0.41370.4137 350350 25.2525.25

Jul `Jul `0808 16.2516.25 1.001.00 5.205.20 0.41370.4137 350350 25.2525.25

Aug `Aug `0808 16.5016.50 1.141.14 5.205.20 0.49120.4912 340340 27.2527.25

Sep `Sep `0808 16.5016.50 1.141.14 5.205.20 0.49120.4912 340340 27.2527.25

Oct Oct `̀0808 16.2516.25 1.181.18 5.105.10 0.55370.5537 330330 26.7526.75

Nov Nov `̀0808 16.2516.25 1.301.30 5.105.10 0.55370.5537 320320 30.4030.40

Dec Dec `̀0808 16.2516.25 1.351.35 5.105.10 0.55370.5537 320320 30.4030.40

Puts and Calls on January 29, 2008Puts and Calls on January 29, 2008

Note: The values in green correspond to the following months options given thatNote: The values in green correspond to the following months options given thatoptions are not available for these monthsoptions are not available for these months


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MonthMonthClass III Class III

PutPutCorn Corn Call Call

SBM SBM Call Call

Total Total CostCost

Mar Mar `̀0909 $2,738$2,738 $622$622 $252$252 $3,130$3,130

Apr Apr `̀0909 $3,455$3,455 $1,121$1,121 $487$487 $3,946$3,946

May `May `0909 $3,993$3,993 $1,183$1,183 $515$515 $4,633$4,633

Jun `Jun `0909 $3,769$3,769 $1,442$1,442 $543$543 $5,259$5,259

Jul `Jul `0909 $4,240$4,240 $1,460$1,460 $550$550 $5,371$5,371

Aug `Aug `0909 $4,774$4,774 $1,712$1,712 $586$586 $5,592$5,592

Sep `Sep `0909 $4,586$4,586 $1,644$1,644 $564$564 $6,329$6,329

Oct Oct `̀0909 $4,809$4,809 $1,877$1,877 $559$559 $6,675$6,675

Nov Nov `̀0909 $5,249$5,249 $1,861$1,861 $632$632 $6,819$6,819

Dec Dec `̀0909 $5,485$5,485 $1,873$1,873 $635$635 $7,106$7,106

TotalTotal $43,099$43,099 $14,793$14,793 $5,324$5,324 $63,216$63,216

Gross options costsGross options costs

Cost of LGM-Dairy,$0 Deductible: $36,107

Total Gross Cost of Puts/Calls: $63,216


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Class III Put ($/cwt) Corn Call ($/bu) SBM Call ($/Ton)

MonthMonth Put Actual Class

III

Put Value

Corn Call

ActualCorn

Corn Call

Value

SBM Call

Actual SBM

SBM Call

Value

Mar Mar `̀0808 17.0017.00 18.0018.00 00 5.005.00 5.45505.4550 0.45500.4550 340340 336.50336.50 00

Apr Apr `̀0808 16.5016.50 16.7616.76 00 5.105.10 6.00256.0025 0.90250.9025 340340 336.60336.60 00

May `May `0808 16.2516.25 18.1818.18 00 5.105.10 5.89755.8975 0.79750.7975 340340 348.00348.00 8.00 8.00

Jun `Jun `0808 16.0016.00 20.2520.25 00 5.205.20 7.24607.2460 2.04602.0460 350350 434.00434.00 84.0084.00

Jul `Jul `0808 16.2516.25 18.2418.24 00 5.205.20 6.57006.5700 1.37001.3700 350350 452.00452.00 102.00102.00

Aug `Aug `0808 16.5016.50 17.3217.32 00 5.205.20 5.68205.6820 0.48200.4820 340340 350.00350.00 10.0010.00

Sep `Sep `0808 16.5016.50 16.2816.28 0.220.22 5.205.20 5.47405.4740 0.27400.2740 340340 359.00359.00 19.0019.00

Oct `Oct `0808 16.2516.25 17.0617.06 00 5.105.10 4.11254.1125 00 330330 254.50254.50 00

Nov `Nov `0808 16.2516.25 15.5115.51 0.740.74 5.105.10 3.80253.8025 00 320320 265.50265.50 00

Dec `Dec `0808 16.2516.25 15.2815.28 0.970.97 5.105.10 3.59503.5950 00 320320 258.50258.50 00

We can compare the We can compare the net costsnet costs of the two programs of the two programs

Cost Comparison of LGM-Dairy WithCost Comparison of LGM-Dairy WithOptions-Based Revenue ManagementOptions-Based Revenue Management

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Gross CostGross CostGross Gross

Cost/CwtCost/CwtNet CostNet Cost

Net Net Cost/CwtCost/Cwt

Put/Call OptionsPut/Call Options

Class IIIClass III $43,099$43,099 $1.039$1.039 $35,285$35,285 $0.851$0.851

CornCorn $14,793$14,793 $0.357$0.357 -$7,332-$7,332 -$0.177-$0.177

SBMSBM $5,324$5,324 $0.128$0.128 $508$508 $0.012$0.012

TotalTotal $63,216$63,216 $1.524$1.524 $28,461$28,461 $0.686$0.686

LGM ($0 Deductible)LGM ($0 Deductible) $36,107$36,107 $0.870$0.870 $36,107$36,107 $0.870$0.870

Note: For options, the Net value represents the costs after subtracting the Note: For options, the Net value represents the costs after subtracting the option value from the initial premiums and then multiplying by the amount option value from the initial premiums and then multiplying by the amount purchased. For LGM-Dairy net cost is the calculated as premium costs purchased. For LGM-Dairy net cost is the calculated as premium costs minus indemnity paid. For the January 2008 contract as specified, there minus indemnity paid. For the January 2008 contract as specified, there would not have been any indemnities paid.would not have been any indemnities paid.

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Gross CostGross CostGross Gross

Cost/CwtCost/CwtNet CostNet Cost

Net Net Cost/CwtCost/Cwt

Put/Call OptionsPut/Call Options

$0 Deductible$0 Deductible $63,216$63,216 $1.524$1.524 $28,461$28,461 $0.686$0.686

$0.80 Deductible$0.80 Deductible $58,993$58,993 $1.422$1.422 $26,560$26,560 $0.640$0.640


LGM-DairyLGM-Dairy

$0 Deductible$0 Deductible $36,107$36,107 $0.870$0.870 $36,107$36,107 $0.870$0.870



Note: Under the options based strategy we reduce the options costs by Note: Under the options based strategy we reduce the options costs by the % reduction in GMG observed under the LGM-Dairy scenarios.the % reduction in GMG observed under the LGM-Dairy scenarios.

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To complement RMA’s website, we developed To complement RMA’s website, we developed software systems for estimating premiums:software systems for estimating premiums: We have 2 versionsWe have 2 versions

Based on historical dataBased on historical data Use of current (previous 3 days) futures and Use of current (previous 3 days) futures and

options to estimate future likely premiumsoptions to estimate future likely premiums

Historical SystemHistorical System: “What if” I had purchase an LGM-: “What if” I had purchase an LGM-Dairy contract 3 months ago?Dairy contract 3 months ago?

On-Demand SystemOn-Demand System: What will be my premium if I : What will be my premium if I purchase a contract at the end of this month?purchase a contract at the end of this month?

UW LGM-Dairy Premium CalculatorsUW LGM-Dairy Premium Calculators

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Historical CalculatorHistorical Calculator Contains a database of actual premium information Contains a database of actual premium information

since August, 2008since August, 2008 Contains a database for premium calculation prior Contains a database for premium calculation prior

to Aug. ′08: Jan. ′00 –July ′08 to Aug. ′08: Jan. ′00 –July ′08 Impacts under alternative market conditionsImpacts under alternative market conditions

Can be used for Can be used for what-ifwhat-if type of analysis type of analysis ““What if I had purchased insurance during What if I had purchased insurance during

Oct?”Oct?” ““How sensitive would my premiums have been How sensitive would my premiums have been

to changes in deductible?”to changes in deductible?”


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University of WisconsinUniversity of Wisconsin Historical Premium CalculatorHistorical Premium Calculator::http://future.aae.wisc.edu/lgm_dairy.html#2http://future.aae.wisc.edu/lgm_dairy.html#2

Automatically Evaluates the Impacts of $0 - $1.50/cwt Automatically Evaluates the Impacts of $0 - $1.50/cwt Deductibles Deductibles

Total and Per CWT PremiumsTotal and Per CWT Premiums Premium as % of GMGPremium as % of GMG Probability of Simulated PayoutsProbability of Simulated Payouts


46

UW LGM-Dairy Historical Premium CalculatorUW LGM-Dairy Historical Premium Calculator can be can be found on the found on the Understanding Dairy MarketsUnderstanding Dairy Markets website website

http://future.aae.wisc.edu/lgm_dairy.html#2


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LGM-Dairy Premium Calculator Input PageLGM-Dairy Premium Calculator Input Page


Choosedeductible

Select yourstate

Select monthfor analysis Enter % coverage

Insert target marketingsand feed equivalents

48

What kind of analyses are automatically displayed?What kind of analyses are automatically displayed?


49

What kind of analyses are automatically displayed?What kind of analyses are automatically displayed?


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To determine if are within allowable feeding ranges:To determine if are within allowable feeding ranges: UW premium calculator automatically checks your UW premium calculator automatically checks your

feeding regime to determine if it falls within the feeding regime to determine if it falls within the desired rangedesired range

Alternatively, you can access the standalone feed Alternatively, you can access the standalone feed conversion softwareconversion software Spreadsheet versionSpreadsheet version

Web-based versionWeb-based version

Automatic Validation of Feed EquivalentsAutomatic Validation of Feed Equivalents

http://future.aae.wisc.edu/lgm-dairy/excel_files/feed_conversions_2.xls

http://future.aae.wisc.edu/conversion/grains

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Contact InformationContact Information

Brian W. GouldBrian W. GouldDept. of Agricultural and Applied EconomicsDept. of Agricultural and Applied EconomicsUniversity of Wisconsin-MadisonUniversity of Wisconsin-Madison(608)263-3212(608)[email protected]@wisc.edu

Victor CabreraVictor CabreraDept. of Dairy ScienceDept. of Dairy ScienceUniversity of Wisconsin-MadisonUniversity of Wisconsin-Madison(608)265-8506(608)[email protected] [email protected]

lgm-dairy: a wisconsin example

Documents

expected class

expected productionlgmdairy

milk class

monthcalculation of

expected pricesmonthly

wisconsin exampleherds

wisconsin examplefeb

monthly milk