Dairy Gross Margin Insurance

Transcription

1 Dairy Gross Margin Insurance Northeast Dairy Leadership Team Alan Zepp Risk Management Program Coordinator Center for Dairy Excellence

2 Agenda What is LGM? What is a Margin? How do I use LGM?

3 Dairy Gross Margin Offered through crop insurance agents Bundled option Class III milk - put option Corn - call option Soybean meal - call option

4 Dairy Gross Margin Purchase last Friday & Saturday of each month until 9 Pm Eastern Coverage period from 1 to 10 months LGM is an insurance policy No potential upside losses

5 Margin not Price

6 LGM Default Margin Values 100 lbs Class III Milk - 1/2 bushel corn (.014T) - 4 lbs soy bean meal (.002T) = Default Dairy LGM Margin

7 Margin vs Milk Price Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Default Dairy Gross Margin PSU Milk Margin Class III Milk Jul-01 Jan-01 Jul-00 Jan-00 $/cwt

8 October 6, 7, & 8 Insured Months Covered Productio n Covered Corn Equiv Covered Soybean Equiv Avg. Milk Futures Avg. Corn Futures Avg. Soybean Meal Futures Gross Margin Base Deductible Per cwt ($) (cwt) (Tons) (Tons) ($/cwt) ($/bu) ($/Tons) Total ($) Dec-10 2, , Jan-11 2, , Feb-11 2, , Mar-11 2, , Apr-11 2, , May-11 2, , Jun-11 2, , Jul-11 2, , Aug-11 2, , Sep-11 2, ,

9 Expected Gross Margin Aug. 08 GM Purchase for July 09 Milk prices = $17.81 times 1 Cwt. = $17.81 Feed prices Corn $ 6.31 bu. X.014T.(1/2 Bu.) = $ 3.16 Soymeal $370.63/T X.002T.(4 lbs)= $.74 Total Feed Cost $ 3.90 Expected Gross Margin(milk feed) $ (All feed is converted to Shelled corn (energy) & Soymeal (protein) equivalents)

10 Actual Gross Margin July 09 Aug. 08 GM Purchase for July 09 Milk prices = $ 9.94 times 1 Cwt. = $ 9.94 Feed prices Corn $ 3.49 bu. X.014T.(1/2 Bu.) = $ 1.75 Soymeal $367.70/T. X.002T.(4 lbs)= $.74 Total Feed Cost $ 2.49 Actual Gross Margin (milk feed) = $ 7.45 (All feed is converted to Shelled corn (energy) & Soymeal (protein) equivalents)

11 Insurance Loss Payment (Indemnity) Aug. 08 GM Purchase for July 09 Expected Gross Margin ---- $ Actual Gross Margin $ 7.45 Ins. Payment (Indemnity) $ 0 deductible

12 August 2008

13 Average of 10 Month Margins Dairy LGM Average ten month EGM vs AGM by month purchased $13.22 $13.02 $12.21 $12.35 $10.73 $10.52 $10.46 $12.68 $11.94 $11.35 $11.06 $11.79 $11.58 $12.11$12.62 $12.76 $12.98 $12.57 $11.73 $11.91 $ $9.36 $8.82 $8.50 $8.25 $8.57 $9.12 $9.51 $9.89 $ $ $ $ $ Jan-09 Dec-08 Nov-08 Oct-08 Sep-08 Aug-08 Nov-09 Oct-09 Sep-09 Aug-09 Jul-09 Jun-09 May-09 Apr-09 Mar-09 Feb-09 Jul-10 Jun-10 May-10 Apr-10 Mar-10 Feb-10 Jan-10 Dec-09 $14.00 $13.00 $12.00 $11.00 $10.00 $9.00 $8.00 EGM AGM

14 October 6, 7, & 8 Insured Months Covered Productio n Covered Corn Equiv Covered Soybean Equiv Avg. Milk Futures Avg. Corn Futures Avg. Soybean Meal Futures Gross Margin Base Deductible Per cwt ($) (cwt) (Tons) (Tons) ($/cwt) ($/bu) ($/Tons) Total ($) Dec-10 2, , Jan-11 2, , Feb-11 2, , Mar-11 2, , Apr-11 2, , May-11 2, , Jun-11 2, , Jul-11 2, , Aug-11 2, , Sep-11 2, ,

15 Expected vs Actual Margins Expected Margins on October 6,7,8 & September close vs 10 Year Average Actual Margins $13.00 $12.00 $11.00 $/cwt $10.00 $9.00 $8.00 $7.00 $6.00 Nov Dec Jan Feb March April May June July Aug Sept Oct 10 Yr Average Actual $0 deductible Expected Margins-Projected October 6,7,& $0 deductible September closing margins

16 Historical Margins Average Margin since February 2000: $11.47 per hundredweight Average Margin since January 2006: $12.11 per hundredweight Highest Margin: $19.21 in July 2007 Lowest Margin: $6.93 in February 2009

17 Deductibles and cost ll /cwt quantities are ratios per Covered Milk. Show ratios per Farm Milk Gross Premium Deductible Total Prem/ Margin % Prem as % of GMG/cwt Level Premium cwt Guarante /cwt GMG e change % GMG Change Prob. of Payout ($/cwt) ($) ($/cwt) ($) (%) ($/cwt) (%) 0 12, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

18 Scenarios Buy 10 months coverage Buy 1 month s production over 3 months 33.33%/month Buy 1 month s production over 10 months 10% / month Use deductibles

19 Cash Flow Insurance $1.50 deductible $1.50 deductible $1.50 deductib Purchase 10 Months Purchase 10 Months Purchase 10 Months Purchase Months Purchase Months Purchase Months Purchase Months 10% each month 10% each month 4, 5. & 6 33% each 4, 5. & 6 33% each 7,8,9,& 10 25% each 7,8,9,& 10 25% each Average Average Average Average Average Average Average Feb 00-Aug Premium Indemnity Premium Indemnity Premium Indemnity Premium Indemnity Premium Indemnity Premium Indemnity Premium Indemnity Per CWT $0.63 $0.78 $0.63 $0.78 $0.12 $0.24 $0.75 $0.82 $0.20 $0.33 $0.85 $0.98 $0.27 $0.41 Bft Cost Ratio # of Months Maximum $24,417 $110,097 $2,442 $11,010 $1,002 $6,945 $2,773 $11,822 $1,517 $8,824 $2,919 $15,169 $1,565 $12,167 Minimum $5,109 $0 $511 $0 $4 $0 $662 $0 $13 $0 $857 $0 $56 $0 Sales period Average/ cwt Average/ cwt Average/ cwt Average/ cwt Average/ cwt since Premium Indemnity Premium Indemnity Premium Indemnity Premium Indemnity Premium Indemnity Premium Indemnity Premium Indemnity August-08 $0.83 $2.05 $0.76 $2.05 $0.24 $0.92 $0.93 $2.32 $0.32 $1.20 $1.19 $2.55 $0.53 $1.10 Bft Cost Ratio Average total Average total Average total Average total Average total Average total Average total Premium Indemity Premium Indemity Premium Indemity Premium Indemity Premium Indemity Premium Indemity Premium Indemity $15,262 $41,009 $1, $2, $ $1, $1, $4, $ $2, $2, $4, $1, $2, Maximum $18,583 $83,791 $2,442 $8,379 $1,002 $5,379 $2,221 $11,822 $924 $8,824 $2,653 $13,221 $1,309 $12,167 Minimum $12,112 $2,778 $1,211 $278 $183 $0 $1,310 $0 $272 $0 $1,709 $370 $711 $0

20 Thank-you

21 Alan Zepp Risk Management Program Coordinator

22 NEW CHANGES Coming to DAIRY Gross Margin Ins. Program WASHINGTON, DC, Aug 25, 2010 RMA announced today that the Federal Crop Insurance Corporation Board of Directors (Board) approved revisions to the Livestock Gross Margin for Dairy Cattle (LGM- Dairy) insurance plan at its August 12, 2010, meeting. The approved revisions include: Federal premium subsidy 18% /zero deductible to 50% /$2 deductible Deductibles from zero to $2 /Cwt. in $0.10 intervals (current max. is $1.50/cwt.) Premium payment timing due End of coverage period. Adjustment feed loads amounts and values - based on information provided by the National Milk Producers Federation.. RMA and Iowa Agricultural Insurance Innovations, the owner of the LGM insurance plans, are working together to implement the Board-approved revisions. The tentative release of the revisions will be in the fall of RMA reminds approved insurance providers that solicitation, sales, marketing, or advertising of these changes is prohibited until RMA releases the revised LGM-Dairy insurance plan materials and make them available to the public.

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25 Deductibles and Cost ll /cwt quantities are ratios per Covered Milk. Show ratios per Farm Milk Gross Premium Deductib Total Prem/cw Margin % as % of GMG/cwt le Level Premium t Guarante Prem/cw GMG e t change % GMG Change Prob. of Payout ($/cwt) ($) ($/cwt) ($) (%) ($/cwt) (%) 0 12, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

26 September 8,9, Covered CoveredCorn Covered Avg. Milk Avg. Corn Avg. Soybean Gross Insured Months Production Equiv Soybean Equiv Futures Futures Meal Futures Deductible (cwt) (Tons) (Tons) ($/cwt) ($/bu) ($/Tons) Total ($) Per cwt ($) Nov-10 2, , Dec-10 2, , Jan-11 2, , Feb-11 2, , Mar-11 2, , Apr-11 2, , May-11 2, , Jun-11 2, , Jul-11 2, , Aug-11 2, ,

27 Sensitivity Analysis Deductible Total Gross Margin Premium as Prob. of Prem/cwt GMG/cwt % Prem/cwt % GMG Level Premium Guarantee % of GMG Payout change Change ($/cwt) ($) ($/cwt) ($) (%) ($/cwt) (%) 0 12, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

28 Current-10 Year & August Margins Expected September Margins vs August Closing & 10 Year Average Actual Margins on $13.00 $12.00 $11.00 $/cwt $10.00 $9.00 $8.00 $7.00 $6.00 Oct Nov Dec Jan Feb March April May June July Aug 10 Yr Average Actual $0 deductible Expected Margins-Projected September 2010 $0 deductible August Closing Expected Margins

29 October 6, 7, & 8 Insured Mont hs Covered Prod uctio n Covered Corn Equi v Covered Soyb ean Equi v Avg. Milk Futur es Avg. Corn Futur es Avg. Soyb ean Meal Futur es Gross Margin Base Deductible (cwt) (Tons) (Tons) ($/cwt) ($/bu) ($/Tons) Total ($) Per cwt ($) Dec-10 2, , Jan-11 2, , Feb-11 2, , Mar-11 2, , Apr-11 2, , May-11 2, , Jun-11 2, , Jul-11 2, , Aug-11 2, , Sep-11 2, ,

30 Scenario $1.50 deductible Purchase Months Purchase Months Purchase 10 Months Purchase 10 Months Purchase 10 Months 4, 5. & 6 33% each 7,8,9,& 10 25%each 10%each month 10% each month Average Average Average Average Average Premium Indemnity Premium Indemnity Premium Indemnity Premium Indemnity Premium Indemnity Feb 00-Aug 09 $178,218 $204,254 $194,011 $235,381 $143,966 $177,331 $1,439,668 $1,773,309 $28,054 $56,004 Bft Cost Ratio Month Avera 114 Month Avera 114 Month Avera 114 Month Averag 113 Month Aver Per CWT $0.76 $0.87 $0.85 $1.03 $0.63 $0.78 $0.63 $0.78 $0.12 $0.24 # of Months Maximun $2,773 $11,822 $3,192 $15,169 $2,442 $11,010 $24,417 $110,097 $1,002 $6,945 Minimum $662 $0 $857 $0 $511 $0 $5,109 $0 $4 $0 Sales period Average/ cwt Average/ cwt Average/ cwt Average/ cwt Average/ cwt since Premium Indemnity Premium Indemnity Premium Indemnity Premium Indemnity Premium Indemnity August-08 $0.93 $2.32 $1.18 $2.55 $0.77 $2.05 $0.83 $2.05 $0.24 $0.92 Average total Average total Average total Average total Average total Premium Indemity Premium Indemity Premium Indemity Premium Indemity Premium Indemity $1, $4, $2, $5, $1, $2, $15,307 $40,961 $ $1, Maximun $2,221 $11,822 $2,653 $13,221 $2,442 $8,379 $18,583 $83,791 $1,002 $5,379 Minimum $1,411 $0 $1,709 $370 $1,211 $278 $12,112 $2,778 $183 $0 Aug08-Aug 09 $31,579 $78,958 $30,699 $66,269 $21,614 $53,249 $216,145 $532,488 $6,278 $23,965 Bft Cost Ratio

31 $1.50 deductible $1.50 deductible $1.50 deductib Purchase 10 Months Purchase 10 Months Purchase 10 Months Purchase Months Purchase Months Purchase Months Purchase Months 10% each month 10% each month 4, 5. & 6 33% each 4, 5. & 6 33% each 7,8,9,& 10 25% each 7,8,9,& 10 25% each Average Average Average Average Average Average Average Feb 00-Aug Premium Indemnity Premium Indemnity Premium Indemnity Premium Indemnity Premium Indemnity Premium Indemnity Premium Indemnity Per CWT $0.63 $0.78 $0.63 $0.78 $0.12 $0.24 $0.75 $0.82 $0.20 $0.33 $0.85 $0.98 $0.27 $0.41 Bft Cost Ratio $1,438,634 $1,773,939 $143,863 $177,394 $28,054 $56,004 $175,735 $192,554 $47,395 $79,612 $191,036 $221,045 $60,194 $93,872 # of Months Maximum $24,417 $110,097 $2,442 $11,010 $1,002 $6,945 $2,773 $11,822 $1,517 $8,824 $2,919 $15,169 $1,565 $12,167 Minimum $5,109 $0 $511 $0 $4 $0 $662 $0 $13 $0 $857 $0 $56 $0 Sales period Average/ cwt Average/ cwt Average/ cwt Average/ cwt Average/ cwt since Premium Indemnity Premium Indemnity Premium Indemnity Premium Indemnity Premium Indemnity Premium Indemnity Premium Indemnity August-08 $0.83 $2.05 $0.76 $2.05 $0.24 $0.92 $0.93 $2.32 $0.32 $1.20 $1.19 $2.55 $0.53 $1.10 Bft Cost Ratio Average total Average total Average total Average total Average total Average total Average total Premium Indemity Premium Indemity Premium Indemity Premium Indemity Premium Indemity Premium Indemity Premium Indemity $15,262 $41,009 $1, $2, $ $1, $1, $4, $ $2, $2, $4, $1, $2, Maximum $18,583 $83,791 $2,442 $8,379 $1,002 $5,379 $2,221 $11,822 $924 $8,824 $2,653 $13,221 $1,309 $12,167 Minimum $12,112 $2,778 $1,211 $278 $183 $0 $1,310 $0 $272 $0 $1,709 $370 $711 $0 Aug08-Aug $215,111 $533,118 $21,511 $53,312 $6,278 $23,965 $31,474 $78,963 $10,977 $40,864 $30,916 $66,269 $13,693 $28,629

32 LGM net cost Pa All milk prices vs LGM NET $24.00 $22.00 $20.00 $18.00 $16.00 $14.00 $12.00 $10.00 $/cwt 1/1/2001 5/1/2001 9/1/2001 1/1/2002 5/1/2002 9/1/2002 1/1/2003 5/1/2003 9/1/2003 1/1/2004 5/1/2004 9/1/2004 1/1/2005 5/1/2005 9/1/2005 1/1/2006 5/1/2006 9/1/2006 1/1/2007 5/1/2007 9/1/2007 1/1/2008 5/1/2008 9/1/2008 1/1/2009 5/1/2009 9/1/2009 1/1/2010 5/1/2010 Pa All milk price Net milk price LGM 4,5,6 Net milk price LGM % Net milk price 10 month 10%/ month $1.50 deductible

33 $12.25 $12.00 $11.75 $11.50 $11.25 $11.00 $10.75 $10.50 $10.25 $10.00 Average Monthly Margins Average LGM Dairy margin by month March April May June July August September October November December LGM Dairy margin February January $/cwt

34 10 Months 100% Coverage P u rch ase 10 M on th s A v e r a g e P rem ium Indem nity F e b A u g 09 $1,439,668 $1,773,309 B f t C o s t R a t io M onth A vera Per CW T $0.63 $0.78 # of M onths M axim un $24,417 $110,097 M inim um $5,109 $0 S ales period Average/ cw t s in c e P r e m iu m In d e m n it y August-08 $0.83 $2.05 Average total Prem ium Indem ity $15,307 $40,961 M axim un $18,583 $83,791 M inim um $12,112 $2,778 A u g 08-Aug 09 $216,145 $532,488 B f t C o s t R a t io 2.46

35 Deductibles Effect of Deductible on Payout Probability Probability of Payout Deductible ($/cwt)

36 Insure Cash Flow Purchase Dairy Gross Margin every month Purchase 1/3 of production each month for months 4,5,&6

37 Benefits Monthly payments Monthly indemnity checks $0 net costs

38 Scenarios P urch ase M on th s P urch ase M on th s 4, 5. & 6 33% each 7,8,9,& 10 25% each A v e r a g e A ve ra g e P rem ium In d em n ity P rem iu m Ind em n ity Feb 00-Aug 09 $178,218 $204,254 $194,011 $235,381 Bft Cost Ratio M on th A vera 114 M onth A ver P er C W T $0.76 $0.87 $0.85 $1.03 # of M onths M axim un $2,773 $11,822 $3,192 $15,169 M inim um $662 $0 $857 $0 S ales period Average/ cw t Average/ cw t since Prem ium Indem nity Prem ium Indem nity August-08 $0.93 $2.32 $1.18 $2.55 Average total Average total Prem ium Indem ity P rem ium Indem ity $1, $4, $2, $5, M axim un $2,221 $11,822 $2,653 $13,221 M inim um $1,411 $0 $1,709 $370 Aug08-Aug 09 $31,579 $78,958 $30,699 $66,269 Bft Cost Ratio

39 10% /Month- 10 Months $1.50 deductible Purch ase 10 M onths Purchase 10 M onth s 10% each month 10% each month Av e ra ge A v e ra g e P rem ium Indem nity P rem ium Indem n ity Feb 00-Aug 09 $143,966 $177,331 $28,054 $56,004 Bft Cost Ratio M onth A verag 113 Month Aver Per CW T $0.63 $0.78 $0.12 $0.24 # of M onths M aximun $2,442 $11,010 $1,002 $6,945 M in i m u m $ $ 0 $ 4 $ 0 S a le s pe rio d A v e ra g e / c w t A ve ra g e / c w t s inc e P re m iu m Ind e m n ity P re m ium In de m nity August-08 $0.77 $2.05 $0.24 $0.92 Average total Average total P re m iu m Ind e m ity P re m ium In de m ity $ 1, $ 2, $ $ 1, M axim un $2,442 $8,379 $1,002 $5,379 M inim um $1,211 $278 $183 $0 Aug08-Au g 09 $21,614 $53,249 $6,278 $23,965 Bft Cost Ratio

40 Buy $13.00 Margin # of Months $13.00 Margin is Available Apr-00 Oct-00 Apr-01 Oct-01 Apr-02 Oct-02 Apr-03 Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr Months -$13 Margins 58 Months -Indemnity 36 Months $13 Margins $13 Indemnity # of Months

41 Buy $12.00 Margin # of Months $12.00 Margin is Available Apr-10 Apr-00 Oct-00 Apr-01 Oct-01 Apr-02 Oct-02 Apr-03 Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct Months-$12 Margins 77 Months-Indemnity 44 Months $12 Margins $12 Indemnity # of Months

42 Price Predictor Pricing Opportunity Class III Annouced price vs closing 9 months previously Class III Announced Price 9-Months Prior Future's Settlement $20.00 $15.00 $10.00 $5.00 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

43 Expected Prices Determined How Expected Gross Margin (ins. guarantee) Minus Actual Gross Margin = Indemnity Producer feed Inputs Target milk Marketings (All or part of your milk) Dairy GM Actual Gross Margin is Calculated Works Expected Gross Margin (Ins. Guarantee) Actual Prices Determined

44 Margins Expected Gross Margin (EGM) by enrollment period vs Actual Gross Margin (AGM) with zero deductible $16.00 $15.00 $14.00 $13.00 $12.00 $11.00 $10.00 $9.00 $8.00 $7.00 $6.00 Jun-11 May-11 Apr-11 Mar-11 Feb-11 Jan-11 Dec-10 Nov-10 Oct-10 Sep-10 Aug-10 Jul-10 Jun-10 May-10 Apr-10 Mar-10 Feb-10 Jan-10 Dec-09 Nov-09 Oct-09 Sep-09 Aug-09 Jul-09 Jun-09 May-09 Apr-09 Mar-09 Feb-09 Jan-09 Dec-08 Nov-08 Oct-08 Aug-08 EGM/cwt Sep-08 EGM/cwt Oct-08 EGM/cwt Nov-08 EGM/cwt Dec-08 EGM/cwt Jan-09 EGM/cwt Feb-09 EGM/cwt Mar-09 EGM/cwt Apr-09 EGM/cwt May-09 EGM/cwt Jun-09 EGM/cwt Jul-09 EGM/cwt Aug-09 EGM/cwt Sep-09 EGM/cwt Oct-09 EGM/cwt Nov-09 EGM/cwt Dec-09 EGM/cwt Jan-10 EGM/cwt Feb-10 EGM/cwt Mar-10 EGM/cwt Apr-10 EGM/cwt May-10 EGM/cwt Jun-10 EGM/cwt Jul-10 EGM/cwt AGM cwt

45 Milk Margin Milk Price / cwt - Feed Cost / cwt milk Milk Margin

46 Advantages of Dairy GM Policy Convenience Producer can insure from 1 to 10 months each sales period. Producer can deal with a local crop insurance agent Dairy GM does not forfeit upside gains (profits)

47 Advantages of Dairy GM Policy Customization The Dairy GM policy can be tailored to any farm size. Contract size is not an issue. Producer can insure any portion of their production

48 How Much Does Dairy GM Cost? Premiums are Revenue Neutral Administrative costs are subsidized, all premiums are used only to pay indemnities, which are intended balance over time High price volatility - higher premium Insure 10 consecutive months, pay less per month than when fewer months insured $0.00 deductibles costs more than $1.50 deductible

49 Dairy Gross Margin Federally reinsured Flexible Contract size Time periods Deductibles

50 Time Periods. Twelve insurance periods each calendar year All or any portion of expected milk can be covered Maximum milk enrollment 240,000 Cwts. Annually Portions of expected monthly production can be stacked