1 LGM-Dairy: A Cost Comparison With Bundled Options

2  LGM-Dairy similar to the use of bundled option risk management strategy  Class III put options → floor milk revenue  Corn/SBM call options → feed cost cieling  How does LGM-Dairy premiums compare to costs of setting a Revenue Floor via bundled options?  For this analysis we:  Assume options perfectly divisible  Compare costs under a variety of deductibles  Purchase insurance in April 2007 and 2008 given actual price data availability Cost Comparison of LGM-Dairy With Options-Based Revenue Management

3  For our example  Calculate gross and net premium costs  Ending options value: An options month’s final settle price if options month An options month’s final settle price if options month Exercise option at end of current month Exercise option at end of current month  Choose nearest put or call to expected price to establish similar minimum net revenue $70 broker fee/options contract $70 broker fee/options contract  Decision Rule: Insure 50% of milk production for months where Class III price is considered a good price Cost Comparison of LGM-Dairy With Options-Based Revenue Management

4 Month April 2007 Month April 2008 Class III ($/cwt) Corn($/bu)SBM($/ton) Corn($/bu)SBM($/ton) Jun ` Jun ` Jul ` Jul ` Aug ` Aug ` Sep ` Sep ` Oct ` Oct ` Nov ` Nov ` Dec ` Dec ` Jan ` Jan ` Feb ` Feb ` Mar ` Mar `  April 2007 and April 2008 Expected Prices A Cost Comparison of LGM-Dairy With Options-Based Revenue Management Note: All Class III prices are located in the 30% area of the empirical distribution

5 Month Class III Put ($/cwt) Class III Premium ($/cwt) Corn Call ($/bu) Corn Call Premium ($/bu) SBM Call ($/ton) SBM Call Premium ($/ton) Jun ` Jul ` Aug ` Sep ` Oct ` Nov ` Dec ` Jan ` Feb ` Mar `  Options purchase data: April 26, 2007 A Cost Comparison of LGM-Dairy With Options-Based Revenue Management

6 Month Class III Put ($/cwt) Class III Premium ($/cwt) Corn Call ($/bu) Corn Call Premium ($/bu) SBM Call ($/ton) SBM Call Premium ($/ton) Jun ` Jul ` Aug ` Sep ` Oct ` Nov ` Dec ` Jan ` Feb ` Mar ` A Cost Comparison of LGM-Dairy With Options-Based Revenue Management  Options purchase data: April 28, 2008

7 LGM-Dairy: Expected Production/Feed Use Month Production (cwt) Corn Equiv. (Tons) SBM Equiv. (Tons) June4, July4, August4, Sept.4, Oct.4, Nov.4, Dec4, Jan4, Feb3, Mar4, Total41,

8 LGM-Dairy: Covered Production/Feed Use Month Production (cwt) Corn Equiv. (Tons) SBM Equiv. (Tons) June2, July2, August2, Sept.2, Oct.2, Nov.2, Dec2, Jan2, Feb1, Mar2, Total20, All Class III prices are in good range

9 Month Class III Put Corn Call SBM Call Total Cost Month Class III Put Corn Call SBM Call Total Cost Jun ` ,226 Jun ` ,884 Jul ` ,535 Jul `08 1, ,691 Aug `07 1, ,226 Aug `08 1,7811, ,317 Sep `07 1, ,208 Sep `08 2,0521, ,648 Oct `07 1, ,228 Oct `08 2,2931, ,204 Nov `07 1, ,266 Nov `08 2,2211, ,087 Dec `07 1, ,443 Dec `08 2,4431, ,332 Jan `08 1, ,326 Jan `09 2,5191, ,516 Feb `08 1, ,491 Feb `09 2,6941, ,698 Mar `08 1, ,681 Mar `09 3,0941, ,138 Total14,3785,9651,28821,631Total21,55713,8493,10938,516  Options Purchase costs: April 2007 and April 2008 A Cost Comparison of LGM-Dairy With Options-Based Revenue Management

10  Gross costs: LGM-Dairy versus bundled options ($0 Deductible) A Cost Comparison of LGM-Dairy With Options-Based Revenue Management April 2007 April 2008 Gross Cost Cost/cwt Cost/Cwt Bundled Options Class III $15,101$0.732$22,279$1.080 Corn$6,206$0.301$14,090$0.683 SBM$1,362$0.066$3,184$0.154 Total$22,669$1.099$39,544$1.917 LGM$14,475$0.715$22,571$1.094

11  Gross costs under alternative deductibles A Cost Comparison of LGM-Dairy With Options-Based Revenue Management April 2007 April 2008 Total Gross Cost Gross Cost/Cwt Total Gross Cost Gross Cost/Cwt Put/Call Options $0 Deductible $22,669$1.099$39,544$1.917 $0.80 Deductible $21,402$1.037$37,200$1.803 $1.50 Deductible $20,293$0.983$35,143$1.703 LGM-Dairy $0 Deductible $14,475$0.715$22,571$1.094 $0.80 Deductible $7,600$0.368$15,065$0.73 $1.50 Deductible $3,761$0.182$10,084$0.49 Note: Under the options based strategy we reduce the options costs by the % reduction in GMG observed under the LGM-Dairy scenarios.

12 Class III Put ($/cwt)Corn Call ($/bu)SBM Call ($/Ton) Month Class III Put Actual Class III Put Value Corn Call ActualCorn Corn Call Value SBM Call Actual SBM SBM Call Value Jun ` Jul ` Aug ` Sep ` Oct ` Nov ` Dec ` Jan ` Feb ` Mar `  Options Ending Values: April 2007 Cost Comparison of LGM-Dairy With Options-Based Revenue Management

13 Class III Put ($/cwt)Corn Call ($/bu)SBM Call ($/Ton) Month Class III Put Actual Class III Put Value Corn Call ActualCorn Corn Call Value SBM Call Actual SBM SBM Call Value Jun ` Jul ` Aug ` Sep ` Oct ` Nov ` Dec ` Jan ` Feb ` Mar `  Options Ending Values: April 2008 Cost Comparison of LGM-Dairy With Options-Based Revenue Management

14  Options net cost  Per unit cost = Subtract ending option value from initial option costs  Net cost ≡ Per unit cost x options amount purchased  LGM-Dairy net cost  Net Cost ≡ LGM-Dairy premiums – indemnity paid Cost Comparison of LGM-Dairy With Options-Based Revenue Management

15  Net costs: LGM-Dairy versus bundled options ($0 Deductible) Cost Comparison of LGM-Dairy With Options-Based Revenue Management April, 2007 April, 2008 Net Cost Cost/Cwt Cost/Cwt Put/Call Options Class III $15,101$0.732-$54,092-$2.621 Corn-$1,740-$0.084$10,927$0.530 SBM-$7,465-$0.362$411$0.020 Total$5,896$0.286-$42,754-$2.072 LGM$14,475$0.715-$27,028-$1.309

16  Net costs under alternative deductibles: April 2007 Cost Comparison of LGM-Dairy With Options-Based Revenue Management Gross Cost Gross Cost/Cwt Net Cost Net Cost/Cwt Put/Call Options $0 Deductible $22,669$1.099$5,896$0.286 $0.80 Deductible $21,402$1.037$5,545$0.269 $1.50 Deductible $20,293$0.983$5,238$0.254 LGM-Dairy $0 Deductible $14,475$0.715$14,475$0.715 $0.80 Deductible $7,600$0.368$7,600$0.368 $1.50 Deductible $3,761$0.182$3,761$0.182

17 Cost Comparison of LGM-Dairy With Options-Based Revenue Management Gross Cost Gross Cost/Cwt Net Cost Net Cost/Cwt Put/Call Options $0 Deductible $39,544$1.917-$42,754-$2.072 $0.80 Deductible $37,200$1.803-$40,211-$1.949 $1.50 Deductible $35,143$1.703-$37,987-$1.841 LGM-Dairy $0 Deductible $22,571$1.094-$26,667-$1.292 $0.80 Deductible $15,065$0.73-$17,667-$0.856 $1.50 Deductible $10,084$0.49-$8,204-$0.398  Net costs under alternative deductibles: April 2008

18  Gross Cost Comparison Summary  $0 deductible Depending on expected prices, gross costs of options may or may not be more than LGM-Dairy Depending on expected prices, gross costs of options may or may not be more than LGM-Dairy Usual case is for bundled options to be more expensive Usual case is for bundled options to be more expensive  Reasonable deductible Gross options costs much greater than LGM-Dairy Gross options costs much greater than LGM-Dairy Cost Comparison of LGM-Dairy With Options-Based Revenue Management

19  Net Cost Comparison Summary  Results obtained are not able to be generalized except that it depends on relative movements of prices after contract initiation Cost Comparison of LGM-Dairy With Options-Based Revenue Management