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Dairy Gross Margin (GM) (Milk Income over Feed Cost) New USDA Risk Management Tool for Dairy Producers Over-view/concepts & illustrations Includes est. for October 2011 & Scenario Analysis Gene Gantz, RMA/USDA, gantz@pa.net, 717-497-6397 Graphics by Karen Powell, PA Ag Dept., Kapowell@pa.gov 717-705-9511 1

What is Dairy Gross Margins Insurance for Producers? It provides producers a monthly opportunity to develop a financial safety-net for the year ahead with protection for the last 10 months of the 12 month period. 2

A Dairy Gross Margin is. Milk Income Over Feed Cost Using all or part of Your Quantities of Milk & Feed Times Board of Trade Prices (class III Milk) for your selected time period(s) that you choose So Dairy Gross Margin Insurance guarantees a pre-determined $ amount of income over feed cost for up to a year into the future! Maximum enrollment; 24,000,000 pounds per year (7/1-6/30) Enrollment periods are monthly last business Friday of each month (exception, 3 rd business Friday and next day in Nov. and Dec.) 4

Calculation Example - Dairy Gross Margins Expected Gross Margin - Insurance Guarantee is: * milk enrolled (any or all milk expected to be produced; for any or all months available) times the BOT futures price * minus feed costs (actual ration or default ration of ½ bu. of corn and 4 lbs. of soybean meal per cwt. of milk) valued at BOT prices (class III milk) * One Month Enrollment Example (4/2009 enrollment for 3/2010): $ 15.45 Milk 1 cwt. cwt (class III) Minus 2.62 Feed cost for 1 cwt of milk using default ((corn=1/2 bu.@$4.18=$2.09) + $12.83 Expected Gross Margin (soymeal=4 lbs.@$266.30/t.=$0.53)) Actual Gross Margin - Calculated same as Expected Gross Margin but prices are updated using futures prices for current month $12.78 Milk 1 cwt. (class III) 2.30 Feed cost for 1 cwt. of milk ((corn=1/2 bu.@$3.57=$1.79) + $10.48 Actual Gross Margin (soymeal=4 lbs.@$255.77/t.=$0.51)) $2.35 loss payment per 1 cwt milk enrolled for one month 5

Dairy Gross Margins Insurance is. Expected gross margin (EGM) Minus Actual gross margin (AGM) = (equals) Insurance loss payment (of > $1) (LP) Formula EGM AGM = Loss Payment. For the producer s selected monthly time period (month or group of months). Board of Trade (BOT) prices used to establish all values 6

Dairy LGM - using default feed values and zero deductible purchased: August 2008 Expected Gross Margin (EGM) vs Actual Gross Margin (AGM) EGM/cwt AGM/cwt $16.00 $15.00 Expected Gross Margin $14.00 $13.00 $12.00 Coverage $11.00 $10.00 $9.00 $8.00 $7.00 Actual Gross Margin $6.00 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Cumulative difference between pink and yellow lines times enrolled amount of milk is estimated amount of indemnity (loss payment) 7

Dairy LGM Average ten month EGM vs AGM by month purchased $15 $14 EGM AGM $13 $12 $11 $10 $9 $8 $7 $6 * Dairy LGM was not available this month. 8 8

$18.00 Expected Gross Margin (EGM) by enrollment period vs Actual Gross Margin (AGM) with zero deductible $17.00 $16.00 $15.00 $14.00 $13.00 $12.00 $11.00 $10.00 $9.00 $8.00 $7.00 $6.00 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 Aug-10 EGM/cwt Sep-10 EGM/cwt Oct-10 EGM/cwt Nov-10 EGM/cwt Dec-10 EGM/cwt Jan-11 EGM/cwt Feb-11 EGM/cwt Mar-11 EGM/cwt *Apr-11 EGM/cwt *May-11 EGM/cwt *June-11 EGM/cwt *July-11 EGM/cwt *Aug-11 EGM/cwt *Sept-11 EGM/cwt AGM cwt * Dairy LGM was not available these mon 9 9

Enrollment Strategies to Consider Jump in and out (rolling the dice) Selecting certain months each enrollment period Buying a fixed amount or percentage of your production each month Insure systematically but varying the deductibles in above strategies based on your confidence in future prices market 10

Enrollment Issues - Dairy LGM 1. How much milk can a producer afford to enroll in dairy LGM (premium cost limitation)? 2. What month(s) are the best time to enroll milk? 3. Are there any performance tested patterns of insuring different months? 11

Potential Performance Retroactive application of DGM since Feb. 2000 Using consistent milk enrollment amounts and selected monthly patterns each enrollment period (monthly, last business Friday and following Saturday) 13

Performance Snapshot of Three Enrollment Patterns (with federal subsidy) Using consistent milk enrollment amounts and selected monthly patterns each enrollment period (Indemnity/Premium) Sales Scenario I Scenario II Scenario III Periods Enrollment Months Enrollment Months Enrollment Months Reviewed Deductibles 4,5, & 6; 33% each mo 7,8,9, & 10; 25% each mo 1,2,3,4,5,6,7,8,9,10; 10% ea mo August 2008 zero 2.53/1.00 1.86/1.00 2.19/1.00 through June 2010 $1.50 6.14/1.00 2.79/1.00 5.53/1.00 10 year zero 1.33/1.00 1.40/1.00 1.50/1.00 retro active performance $1.50 3.26/1.00 2.99/1.00 3.84/1.00 Estimates for educational purposes only provided by Alan Zepp with the PA Center for Dairy Excellence 14

If you choose less than 10 month enrollments your safety-net may have holes in it 15

Improved LGM DAIRY Gross Margin Insurance Program (income over Feed Cost) Program Improvements Effective Beginning with Enrollment of December 17, 2010 include: 1. Program available in all 48 contiguous states 2. Available deductibles from zero to $2 /cwt in $0.10/cwt intervals 3. The federal premium subsidy: 4. Premium payment due date end of insurance period - billing the first business day after the end of the enrollment (insurance) period during which producer enrolled. 5. Maximum feed loads amounts/values increased to allow producers to include for grain, forage, young cattle and dry cow feed Feed limit restrictions per 1 cwt of milk for calculating feed cost of DGM margin Feed cost comparison of different rations Corn Equivalents Soybean Meal Equivalents Corn @ Soybean Meal@ Total Cost Bu. Ton Lbs. Ton $5.85 bu. $340 ton Minimum Limit 0.13 0.0036 1.61 0.0008 $0.76 $0.27 $1.03 New Max. Limit 1.36 0.0381 26.00 0.013 $7.96 $4.42 $12.38 Default 0.50 0.014 4.00 0.002 $2.93 $0.68 $3.61 For details contact crop insurance agent (list available @ http://www3.rma.usda.gov/apps/agents/) Rev.12-31-2010 16

Dairy Income over Feed Cost Projections - Using RMA Dairy Gross Income Ins. Rules Rough Est. for: October 28 & 29 (Dec 2011 thru Sept. 2012 milk) (Illustration for Educational Purposes) The data is derived from futures and options prices from dates: 2011-10-10, 2011-10-11, 2011-10-12 Months Available Amount Enrolled in Dairy GM Gross Margin Calculating the Gross Margins Prices Used to calculate gross margins Feed Quantities used to calculate gross margins) Insured Months Covered Production Each month Est. Gross Margin Guarantee @ 0 Deductible (income over feed costs) Est, Milk Price (class 3 futures) Est.Total Feed Cost (futures) Est.. Corn Est. or Soybean Equivlants Meal or Price Equivalents (futures) Price @ 1/2 (futures) @ bu./cwt of 4 lbs./cwt milk of milk Avg. Milk Futures Avg. Corn Futures Avg. Soybean Meal Futures Covered Corn Equiv Covered Soybean Equiv cwt/month $/cwt $/cwt ($)/cwt Milk ($) ($) ($/cwt) ($/bu) ($/ton) (Tons) (Tons) Dec-11 1 12.60 16.38 3.78 3.15 0.63 16.38 6.30 317.27 0.014 0.002 Jan-12 1 12.45 16.26 3.81 3.17 0.64 16.26 6.34 319.59 0.014 0.002 Feb-12 1 12.33 16.17 3.84 3.20 0.64 16.17 6.39 321.28 0.014 0.002 Mar-12 1 12.30 16.16 3.86 3.22 0.65 16.16 6.43 322.96 0.014 0.002 Apr-12 1 12.35 16.23 3.88 3.23 0.65 16.23 6.46 323.94 0.014 0.002 May-12 1 12.30 16.20 3.90 3.25 0.65 16.20 6.50 324.92 0.014 0.002 Jun-12 1 12.57 16.48 3.91 3.26 0.65 16.48 6.52 326.30 0.014 0.002 Jul-12 1 12.89 16.82 3.93 3.27 0.66 16.82 6.54 327.68 0.014 0.002 Aug-12 1 13.14 16.97 3.83 3.18 0.65 16.97 6.35 327.41 0.014 0.002 Sep-12 1 13.39 17.12 3.73 3.08 0.65 17.12 6.16 325.58 0.014 0.002 Total/Avg. 10 12.63 16.48 3.85 3.20 0.65 16.48 6.40 323.69 Avg. for 10 month Default feed amounts used to calculation (corn:.014t.=1/2 bu, soymeal:.002t.=4 lbs. to produce 1 cwt, of milk) The above estimated information is from the homepage of the University of Wisconsin Dairy Marketing and Risk Management Program and is maintained by Prof. Brian W. Gould of the Dept. of Agric. and Applied Economics. It is recommended that you use the browser: http://future.aae.wisc.edu/lgm_analyzer/ LAST MONTH - Sept. 2011 Enrollment Period (Snapshot of Expected Gross Margins per Cwt. of Milk Enrolled) Eligible months Expected Gross Margins Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 10 mo. Avg. $12.79 $12.89 $12.78 $12.63 $12.66 $12.48 $12.58 $12.80 $13.11 $13.28 $12.80 17

Early Estimates for Oct. Enrollment (10/28 & 29/2011) Zero Deductible; 10/11, 11, &12 /11 futures prices used to calculate margins Coverage Month Month Year Covered Milk Expected Price Covered Corn Expected Price Monthly Gross Margin (tons) Covered SBM Milk Revenue $/cwt of $/cwt of Expected Covered Price - Corn Cost Farm Milk Milk #NAME? #NAME? #NAME? - SBM Cost Corn SBM - (Deductible Qty. Qty. Milk Qty.) 100 100 cwt 1.4 1.4tons 0.2 0.2tons 100 $16.38/cwt $6.30/bu $317.27/ton Dec 2011 = $1,638 = $315 = $63 1,259 Jan- 12 Production Milk Qty. (cwt) Corn Equiv (tons) Soybean Meal Equiv 100 100 cwt 1.4 1.4tons 0.2 0.2tons 100 $16.26/cwt $6.34/bu $319.59/ton = $1,626 = $317 = $63 % covered 100 100 cwt 1.4 1.4tons 0.2 0.2tons 100 $16.17/cwt $6.39/bu $321.28/ton Feb- 12 = $1,617 = $319 = $64 1,233 100 100 cwt 1.4 1.4tons 0.2 0.2tons 100 $16.16/cwt $6.43/bu $322.96/ton Mar- 12 = $1,615 = $321 = $64 1,229 12.3 12.3 100 100 cwt 1.4 1.4tons 0.2 0.2tons 100 $16.23/cwt $6.46/bu $323.94/ton Apr- 12 = $1,622 = $323 = $64 1,234 100 100 cwt 1.4 1.4tons 0.2 0.2tons 100 $16.20/cwt $6.50/bu $324.92/ton May- 12 = $1,619 = $325 = $65 1,230 12.3 12.3 100 100 cwt 1.4 1.4tons 0.2 0.2tons 100 $16.48/cwt $6.52/bu $326.30/ton Jun- 12 = $1,647 = $326 = $65 1,256 100 100 cwt 1.4 1.4tons 0.2 0.2tons 100 $16.82/cwt $6.54/bu $327.68/ton Jul- 12 = $1,681 = $327 = $65 1,289 12.89 12.89 100 100 cwt 1.4 1.4tons 0.2 0.2tons 100 $16.97/cwt $6.35/bu $327.41/ton Aug- 12 = $1,696 = $317 = $65 1,313 12.6 12.6 1,244 12.45 12.45 12.33 12.33 12.35 12.35 12.57 12.57 13.14 13.14 100 100 cwt 1.4 1.4tons 0.2 0.2tons 100 $17.12/cwt $6.16/bu $325.58/ton Sep- 12 = $1,711 = $308 = $65 1,338 13.39 13.39 Total Farm 1,000 cwt 14 tons 2 tons GMG 100.00% C overed 1,000 cwt 14 tons 2 tons 12,631 12.63 12.63 The above estimated information is from the homepage of the University of Wisconsin Dairy Marketing and Risk Management Program and is maintained by Prof. Brian W. Gould of the Dept. of Agric. and Applied Economics. It is recommended that you use the browser: http://future.aae.wisc.edu/lgm_analyzer/ 19

Summary of protection and estimated cost Deductible Total Subsidiz Net % Net Net Net Net Net GMG Net GMG Prob. % GMG GMG/cwt GMG/cwt ed Premium Prem. Prem/cwt GMG/cwt Prem/cwt GMG/cwt Level Premium Premium ($) ($) of as % change Change of Farm of Farm of Farm of of of Covered Covered Covered ($/cwt) ($) ($) Payout of GMG Milk Milk Milk Milk Milk Milk (%) (%) ($/cwt) ($/cwt) ($/cwt) ($/cwt) ($/cwt) ($/cwt) 0 950 779 12,631 11,852 52 6.17 - - 0.78 12.63 11.85 0.78 12.63 11.85 0.1 897 727 12,531 11,804 50 5.8-6.7-0.79 0.73 12.53 11.8 0.73 12.53 11.8 0.2 846 668 12,431 11,762 48 5.38-14.19-1.58 0.67 12.43 11.76 0.67 12.43 11.76 0.3 797 613 12,331 11,717 46 4.98-21.23-2.38 0.61 12.33 11.72 0.61 12.33 11.72 0.4 749 562 12,231 11,669 45 4.6-27.85-3.17 0.56 12.23 11.67 0.56 12.23 11.67 0.5 703 506 12,131 11,624 43 4.18-34.99-3.96 0.51 12.13 11.62 0.51 12.13 11.62 0.6 659 455 12,031 11,576 41 3.78-41.61-4.75 0.46 12.03 11.58 0.46 12.03 11.58 0.7 617 407 11,931 11,523 40 3.41-47.72-5.54 0.41 11.93 11.52 0.41 11.93 11.52 0.8 577 357 11,831 11,473 38 3.02-54.09-6.33 0.36 11.83 11.47 0.36 11.83 11.47 0.9 538 323 11,731 11,408 36 2.76-58.52-7.13 0.32 11.73 11.41 0.32 11.73 11.41 1 501 261 11,631 11,370 34 2.24-66.51-7.92 0.26 11.63 11.37 0.26 11.63 11.37 1.1 466 233 11,531 11,297 33 2.02-70.05-8.71 0.23 11.53 11.3 0.23 11.53 11.3 1.2 433 216 11,431 11,214 31 1.89-72.21-9.5 0.22 11.43 11.21 0.22 11.43 11.21 1.3 401 200 11,331 11,130 30 1.77-74.25-10.29 0.2 11.33 11.13 0.2 11.33 11.13 1.4 371 185 11,231 11,045 28 1.65-76.18-11.08 0.19 11.23 11.05 0.19 11.23 11.05 1.5 342 171 11,131 10,959 27 1.54-78.01-11.88 0.17 11.13 10.96 0.17 11.13 10.96 1.6 315 157 11,031 10,873 25 1.43-79.73-12.67 0.16 11.03 10.87 0.16 11.03 10.87 1.7 290 145 10,931 10,786 23 1.33-81.36-13.46 0.15 10.93 10.79 0.15 10.93 10.79 1.8 266 133 10,831 10,698 22 1.23-82.9-14.25 0.13 10.83 10.7 0.13 10.83 10.7 1.9 244 122 10,731 10,609 21 1.14-84.34-15.04 0.12 10.73 10.61 0.12 10.73 10.61 2 223 111 10,631 10,519 19 1.05-85.69-15.83 0.11 10.63 10.52 0.11 10.63 10.52 20

Reasons to Buy - Dairy Gross Margins Insurance (DGM) 1. Establish monthly safety-net - develop and implement a financial safety-net for your business plan for the year ahead, with protection the last 10 months of each 12 month enrollment period. Enrollment periods are last business Friday and following day each month (likely exception, 3 rd business Friday and next day in Nov. & Dec.). 2. Enrollment pattern - the best performing enrolling strategy favors a consistent amount of milk being enrolled each month of each enrollment period. Estimated benefit cost ratios are 1.50 @ zero and 3.84 at $1.50 per cwt deductible, when following this pattern over the past 10 years. 3. Reduce feed piece volatility risk - DGM provides protection from increased feed prices when milk prices do not have a corresponding increase. 4. Premium subsidy and time of payment - if enrollment is for two or more months and not billed until end of insurance (enrollment) period. 5. If you can accurately predict futures prices - enroll in DGM at a low cost, good performing, higher deductible so that you are protected if the futures prices do not follow your expectations. 6. Apply savings from CWT program 2011 contributions dropped from 10 to 2 cents, apply the 8 cent per cwt cost reduction to purchase a dairy risk management plan. 7. Create improved MILC program appropriate amounts of milk enrollment in DGM may be used to function similar to MILC payments. 8. Acquire increased loan security DGM can increase you loan security to improve your credit worthiness. Indemnities are assignable. Summary: * DGM pays when you receive less from the marketplace than the gross margin guarantee. The market place also pays more timely * Having a reliable risk management plan protects the business, your family, and your good stewardship. 21

Expected BOT 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 BOT Prices Determined 22

Dairy LGM Average ten month EGM vs AGM by month purchased $15 $14 EGM AGM $13 $12 $11 $10 $9 $8 $7 $6 * Dairy LGM was not available this month. 24 24

It s a program that can help a producer survive a disaster and return to profitability! 26

Gross Margins for Different Feed Rations

Swine Gross Margins

Swine Gross Margins Expected Gross Margins (EGM) vs Actual Gross Margins (AGM) per head for Swine Farrow to Finish (804) $120 $110 $100 DRAFT $90 $80 $70 $60 $50 $40 $30 $20 July 2010 EGM Aug 2010 EGM Sept 2010 EGM Oct 2010 EGM Nov 2010 EGM Dec 2010 EGM Jan 2010 EGM Feb 2010 EGM Mar 2010 EGM Apr 2010 EGM May 2010 EGM June 2010 EGM July 2011 EGM Aug 2011 EGM Sept 2011 EGM Oct 2011 EGM Nov 2011 EGM Dec 2011 EGM Jan 2011 EGM Feb 2011 EGM Mar 2011 EGM Apr 2011 EGM May 2011 EGM June 2011 EGM AGM

Livestock Gross Margin Insurance Protection for Swine (Draft 8/31/11) Available in 48 contiguous states Gross margin protection (income minus feed cost (based on board of trade prices) for swine to be sold for commercial or private slaughter can be covered by this RMA/USDA The program uses futures prices to determine the Expected Gross Margin and the Actual Gross Margin. An indemnity may be payable when the Actual Gross Margin is less than the Expected gross Margin for the enrollment period (The price the producer receives at the local market is not used in these calculations). Types of Operations Covered: Farrow to Finish Operation - A type of farm operation that covers all aspects of breeding, farrowing and raising swine to slaughter. Feeder Pig Finishing Operation - A type of farm operation that specializes in the feeding of swine (feeder pigs) from a weight of approximately 50 pounds to slaughter. Swine Gross Margins Ins. Protection Enrollment: SEW Operation - A type of farm operation that specializes in the feeding of swine (Segregated Early Weaned pigs) from the age of approximately 12-21 days to slaughter. Can insure the swine a producer expects to market during each enrollment period. Twelve times per year (last business Friday of each month). There are twelve Insurance periods per year, each is for six months, with coverage available for last 5 months of the 6 month period. The first enrollment period Expected to be available October 28, 2011 Target Marketings: All or part of swine may be included for all or selected months of each insurance period, not to exceed 15,000 head per insurance period or 30,000 head period/reinsurance year. Coverage: Prices: Deductibles: Protects against loss of gross margin (market value minus feed costs) of swine. Begins the second month following sales closing date and can continue for the next 5 months. Based on simple averages of futures contract daily settlement prices. Chose from $0-$20 deductible per head in $2 increments. Expected Gross Margin (EGM): Based on the market value of the swine minus feed costs (corn and soybean meal equivalents) using CME futures prices. Actual Gross Margin (AGM): Based on the market value of the swine minus feed costs using CME Actual Prices. Actual Gross Margin per Swine by type of operation (combination types on same policy have separate guarantees and loss payments): For farrow to finish operations, the actual swine price for the month swine are marketed times 0.74, times the assumed weight of the swine at marketing (260 pounds, or as stated in the Special Provisions), minus the actual cost of feed three months prior to that month, (using CME prices). For feeder and SEW pig finishing operations: the actual swine price for the month swine are marketed times 0.74, times the assumed weight of the swine at marketing 260 pounds, or as stated in the Special Provisions, minus the actual cost of feed two months prior to that month (using CME prices). For example, the actual gross margin per swine for April for a farrowing to finish operation is the actual swine price for April times 0.74, times 2.6 hundredweight, less the actual cost of feed for January. For feeder pig finishing operations or SEW pig finishing operations: the actual gross margin per swine for April is the actual swine price for April times 0.74, times 2.6 hundredweight, less the actual cost of feed for February Indemnity: If the Actual Gross Margin is less that the Expected Gross Margin (minus the deductible) for the period of enrollment an indemnity may be payable. For More Information: See http://www.rma.usda.gov/livestock or Contact a crop insurance agent (list available www.rma.usda.gov).

It s a program that can help a producer survive a disaster and return to profitability!