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

What is Dairy Gross Margins Insurance do 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. Enrollment periods are monthly last business Friday of each month (exception, 3rd business Friday and next day in Nov. and Dec.)

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)

Calculation Example - Dairy Gross Margins

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

Cumulative difference between pink and yellow lines times enrolled amount of milk is estimated amount of indemnity (loss payment)

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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

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?

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)

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

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Early Estimates for September Enrollment (9/30-10/1/2011) Zero Deductible; 9/14-16 futures prices used to calculate margins 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/ 18

Summary of protection and estimated cost 19

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

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