1. University Extension/Department of Economics Update on Pasture, Rangeland and Forage Insurance and LGM-Dairy Insuring Iowa’s Agriculture Ames, Iowa Nov. 9, 2010 Chad Hart Assistant Professor/Grain Markets Specialist chart@iastate.edu 515-294-9911

2. University Extension/Department of Economics Pasture, Rangeland, and Forage In the U.S.: –Over 580 million acres of pasture and rangeland –Over 60 million acres of hay Takes a unique policy to cover the risk for livestock feeding operations Pasture, Rangeland, and Forage (PRF) contains two unique approaches to the issue

3. University Extension/Department of Economics Pasture, Rangeland, and Forage Rainfall Index (RI) –Based on NOAA weather data Vegetation Index (VI) –Based on satellite vegetation data from the U.S. Geological Survey

4. University Extension/Department of Economics Title 2012 Source: RMA

5. University Extension/Department of Economics Rainfall Index Uses NOAA grid data –Historical data going back to 1948 Provides protection again low precipitation events (as measured by an index across a grid of land) Rainfall index set at 100 = “normal precipitation” Covers hay land or grazing land

6. University Extension/Department of Economics Rainfall Index Coverage levels –65 (CAT), 70, 75, 80, 85, and 90 % Dollar amount of protection per acre –Base level set at the county (County base value) –Insured picks protection factor: 60 to 150% –Dollar amount of protection per acre = County base value * Coverage level * Protection factor

7. University Extension/Department of Economics Rainfall Index Coverage for at least two 2-month periods (Example: Jan-Feb and June-July) Indemnities are paid when the actual rainfall index is below the insured index level –Same value as the coverage level

8. University Extension/Department of Economics Rainfall Grids Source: AgForce, GMS, and RMA 0.25 degrees lat and long Roughly 17 miles north to south and 12 miles west to east

9. University Extension/Department of Economics Rainfall Grids Source: AgForce, GMS, and RMA

10. University Extension/Department of Economics RI Example In 2010 for grid 24745 –Premium rates ranged from $11.24 (May- June) to $20.44 (Nov-Dec) for $100 of protection –County base values of $39.21 for grazing land and $194.47 for hay land

11. University Extension/Department of Economics RI Example If I covered hay land for Nov-Dec at the 90% coverage level with a 150% protection factor –Then my dollar amount of protection is $262.53 per acre ($194.47 * 90% * 150%) –And I’ll get an indemnity if the RI falls below 90 in Nov-Dec –If the actual RI is 75, then I receive $43.76 per acre ($262.53 * {[90-75]/90})

12. University Extension/Department of Economics Vegetation Index Uses U.S. Geological Survey satellite data –Historical data going back to 1989 Provides protection again decreased vegetation events (as measured by an index across a grid of land) Vegetation index (Normalized Difference Vegetation Index [NDVI]) set at 100 = “normal vegetation” Covers hay land or grazing land

13. University Extension/Department of Economics Vegetation Index Coverage levels –65 (CAT), 70, 75, 80, 85, and 90 % Dollar amount of protection per acre –Base level set at the county (County base value) –Insured picks protection factor: 60 to 150% –Dollar amount of protection per acre = County base value * Coverage level * Protection factor

14. University Extension/Department of Economics Vegetation Index Coverage for at least one 3-month period (Example: June-Aug) Indemnities are paid when the actual vegetation index is below the insured index level –Same value as the coverage level

15. University Extension/Department of Economics Vegetation Grids Source: AgForce, GMS, and RMA 4.8 mile square

16. University Extension/Department of Economics Vegetation Grids Source: AgForce, GMS, and RMA

17. University Extension/Department of Economics Vegetation Grids Source: AgForce, GMS, and RMA

18. University Extension/Department of Economics VI Example In 2010 for grid 85252 –Premium rates ranged from $11.52 (Aug- Oct) to $17.05 (June-Aug) for $100 of protection –Coverage only available Apr-Oct –County base values of $27.21 for grazing land and $197.88 for hay land

19. University Extension/Department of Economics VI Example If I covered hay land for Aug-Oct at the 80% coverage level with a 120% protection factor –Then my dollar amount of protection is $189.96 per acre ($197.88 * 80% * 120%) –And I’ll get an indemnity if the NDVI falls below 80 in Aug-Oct –If the actual NDVI is 75, then I receive $11.87 per acre ($189.96 * {[80-75]/80})

20. University Extension/Department of Economics PRF Information PRF Policy Information http://www.rma.usda.gov/policies/pasturerangeforage/ http://www.rma.usda.gov/policies/pasturerangeforage/ PRF Decision Tool http://agforceusa.com/rma/ri/prf/maps http://agforceusa.com/rma/ri/prf/maps

21. University Extension/Department of Economics Shifting to LGM-Dairy First, a note on my conflict of interest I am one of the creators of LGM-Dairy I still rate the product and receive compensation for its sale

22. University Extension/Department of Economics What is LGM Dairy? A dairy insurance program run through the U.S. federal crop insurance program Provides protection against unexpected declines in gross margin (market value of milk minus feed costs) on insured quantities of milk Uses futures prices to determine the expected gross margin and the actual gross margin.

23. University Extension/Department of Economics Changes Coming to LGM Dairy Changes approved earlier this fall Will be implemented in December Higher deductibles allowed, up to $2.00 per cwt. Premium will be due near the end of insurance period (like crop insurance) Feed ranges are increased Premium subsidies will be available for policies covering multiple months

24. University Extension/Department of Economics Deductibles Current rule: Deductible between zero and $1.50 per cwt. of milk in 10¢ increments New rule: Deductible between zero and $2.00 per cwt. of milk in 10¢ increments Provides users greater range of risk management coverage and allows users to choose “catastrophic” levels of protection

25. University Extension/Department of Economics Historical Choice on LGM-Dairy Deductibles Source: RMA

26. University Extension/Department of Economics Premium Timing Current rule: Premium due at sign-up New rule: Premium due at the end of the coverage period The premium billing date is the 1 st business day of the month after the last month of the target marketings for the policy Makes the premium timing more like that for crop insurance

27. University Extension/Department of Economics Premium Timing For the 2010 reinsurance year, the average LGM-Dairy policy that was purchased had a premium of $5,833 Sizable premiums up-front can create cash flow issues Delayed premiums, timed with potential indemnities, reduce those issues

28. University Extension/Department of Economics Feed Ranges In LGM-Dairy, producers can choose from a range of feed values Change in feed ranges allows for higher feed levels Default values of 0.5 bushels of corn and 4 pounds of soybean meal per cwt. of milk remain the same

29. University Extension/Department of Economics Feed Ranges Current range: –Corn: 0.13 to 1.04 bushels per cwt. of milk –Soy Meal: 1.61 to 12.85 pounds per cwt. New range: –Corn: 0.13 to 1.36 bushels per cwt. –Soy Meal: 1.61 to 26 pounds per cwt.

30. University Extension/Department of Economics Premium Subsidies Premium subsidies provided for “pooled coverage” – insuring milk in two or more months during the insurance period No subsidy is provided if the policy is only insuring milk in one month

31. University Extension/Department of Economics Subsidy Table

32. University Extension/Department of Economics Example Premiums From Sept. 2010 premium rates, insuring 1560 cwt. of milk, 20.5 tons of corn, and 6 tons of soy meal in May and June 2011

33. University Extension/Department of Economics Example Premiums

34. University Extension/Department of Economics Quick Review on LGM-Dairy Higher deductibles allowed, up to $2.00 per cwt. Premium will be due at the end of coverage Feed ranges are increased Premium subsidies will be available for policies covering multiple months Changes effective Dec. 17, 2010

35. University Extension/Department of Economics LGM-Dairy Information LGM Policy Information http://www.rma.usda.gov/livestock/ http://www.rma.usda.gov/livestock/ LGM-Dairy Decision Tools http://future.aae.wisc.edu/lgm_dairy.html http://future.aae.wisc.edu/lgm_dairy.html

36. University Extension/Department of Economics Thank you for your time! Any questions? My web site: http://www.econ.iastate.edu/~chart/ Iowa Farm Outlook: http://www.econ.iastate.edu/outreach/agriculture/periodicals/ifo/ Ag Decision Maker: http://www.extension.iastate.edu/agdm/