1. Agricultural Marketing
ECON 337:
Agricultural Marketing
Lee Schulz
Assistant Professor
Chad Hart
Associate Professor 1

2. 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.

3. What is LGM Dairy?
LGM for Dairy covers the difference between the gross margin guarantee and the actual gross margin.
LGM for Dairy does not insure against death loss or any other cause of production loss or damage to the producer’s dairy cattle.

4. What LGM Does Not Do
LGM does not protect milk producers against multiple year declines in milk prices or increased feed costs
LGM does not protect milk producers against anticipated declines in milk prices or increased feed costs

5. Gross Margin Guarantee–
Actual Gross Margin =
Indemnity
Expected Prices
Determined
How LGM Works
Producer Inputs
Target Marketings
and Feed
Actual Gross
Margin
Calculated
Gross Margin
Guarantee
Actual Prices
Determined

6. Insurance Period Example: October 2012 sales period
Nov. 2012
Dec. 2012
Jan. 2013
Feb. 2013
Mar. 2013
Apr. 2013
May 2013
June 2013
July 2013
Aug. 2013
Sept. 2013
Blackout Month: No milk can be insured
10 month coverage period
You choose which months to insure.
You can skip months.

7. Expected Prices Prices come from the Chicago Mercantile Exchange (CME)
Milk Price = Class III Milk Futures Price
Feed costs based on Corn and Soybean Meal Futures Prices
Expected prices are three-day average of futures prices right before sales closing

8. Expected Prices Example: Sept. 2012 sales period, Milk prices Nov.
Dec.
Jan.
Feb.
Mar.
9/26/2012
20.89
20.11
19.63
19.30
19.03
9/27/2012
20.68
19.79
19.35
19.12
18.92
9/28/2012
20.83
19.86
19.42
19.11
Average
20.80
19.92
19.47
19.18
18.96
Prices are in $ per hundredweight of milk

9. Expected Prices Example: Sept. 2012 sales period, Corn prices Nov.
Dec.
Jan.
Feb.
Mar.
9/26/2012
7.2475
7.285
9/27/2012
7.1625
7.195
9/28/2012
7.5625
7.595
Average
7.47
7.32
7.33
7.35
7.36
Fill in missing months with weighted average from futures months
Prices are in $ per bushel of corn

10. Prices are in $ per ton of soybean meal
Expected Prices
Example: Sept sales period, Soybean Meal prices
Nov.
Dec.
Jan.
Feb.
Mar.
9/26/2012
476.90
474.00
456.80
9/27/2012
473.90
470.40
451.30
9/28/2012
486.90
483.90
468.40
Average
478.82
479.23
476.10
467.47
458.83
Prices are in $ per ton of soybean meal

11. 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

12. Feed Ranges Current range: New range:
Corn: 0.13 to 1.04 bushels per cwt. of milk
Soy Meal: 1.61 to pounds per cwt.
New range:
Corn: 0.13 to 1.36 bushels per cwt.
Soy Meal: 1.61 to 26 pounds per cwt.

13. Producer Inputs You choose:
What months to insure milk
How much milk to insure each month
How much feed to include in the margin
How big a deductible to use
Deductible: $0.00 to $2.00 per hundredweight of milk in 10¢ increments

14. Producer Inputs Example: Sept. 2012 sales period Sept. Oct. Nov. Dec.
Jan.
Milk to Insure
1,500
750
Corn Fed 20 10
Soybean Meal Fed 6 3
Quantities are hundredweights of milk and tons of corn and soybean meal

15. 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

16. Subsidy Table

17. Gross Margin Guarantee
Gross Margin = Milk Revenue minus Feed Costs
Milk Revenue =
Amount of milk * Class III Milk Futures Price
Feed Costs =
Amount of corn * Corn Futures Price +
Amount of soybean meal * Soybean Meal
Futures Price

18. Gross Margin Guarantee
Expected Gross Margin =
Milk Revenue – Feed Costs
(using Expected Prices)
Gross Margin Guarantee =
Expected Gross Margin – Deductible * Amount of milk

19. Gross Margin Guarantee
Example: Insuring Nov in Sept. 2012
Expected Prices:
Milk = $20.80/cwt.
Corn = $7.47/bu.
Soybean Meal = $478.82/ton
Producer Inputs:
Deductible = $0.50/cwt.
Milk Insured = 1,500 cwt.
Corn Fed = 20 tons
Soybean Meal Fed = 6 tons

20. Gross Margin Guarantee
Milk Revenue = $20.80/cwt. * 1,500 cwt.
= $31,200.00
Feed Costs = $7.47/bu. * (2,000/56) * 20 tons $478.82/ton * 6 tons
= $8,208.63
Expected Gross Margin = $31, – $8,208.63
= $22, (or $15.33/cwt.)
Gross Margin Guarantee
= $22, – $0.50/cwt. * 1,500 cwt.
= $22, (or $14.83/cwt.)
Converting bushels to tons

21. Expected Gross Margins, Sept 2012
$5.35/cwt. Feed Costs
$4.83/cwt. Feed Costs

22. Actual Prices Prices come from the Chicago Mercantile Exchange (CME)
Milk Price = Class III Milk Futures Price
Feed costs based on Corn and Soybean Meal Futures Prices
Actual prices are three-day average of futures prices right before expiration of futures contract
Use same rules to fill in corn and soybean meal prices during months with no futures

23. Actual Prices Actual Milk Prices Actual Corn Prices
Nov Average from Nov
Dec Average from Dec. 28-Jan. 2
Jan Average from Jan
Actual Corn Prices
Dec Average from Dec
Mar Average from Mar

24. Actual Gross Margin Actual Gross Margin = Milk Revenue – Feed Costs
(using Actual Prices)

25. Actual Gross Margin Example: Insuring Nov. 2012 in Sept. 2012
Actual Prices (let’s assume):
Milk = $19.50/cwt.
Corn = $7.50/bu.
Soybean Meal = $480.00/ton
Producer Inputs:
Milk Insured = 1,500 cwt.
Corn Fed = 20 tons
Soybean Meal Fed = 6 tons

26. Converting bushels to tons
Actual Gross Margin
Milk Revenue = $19.50/cwt. * 1,500 cwt.
= $29,250.00
Feed Costs = $7.50/bu. * (2,000/56) * 20 tons $480.00/ton * 6 tons
= $8,237.14
Actual Gross Margin = $29, – $8,237.14
= $21, (or $14.01/cwt.)
Converting bushels to tons

27. Indemnity
If your Actual Gross Margin is less than your Gross Margin Guarantee, then you are due an indemnity
Indemnity = Gross Margin Guarantee
– Actual Gross Margin
In our example,
Indemnity = $22, – $21,012.86
= $1, (or $0.82/cwt.)

28. If You Insure Multiple Months
Your Gross Margin Guarantee is the sum of each month’s Gross Margin Guarantee
Your Actual Gross Margin is the sum of each month’s Actual Gross Margin
So losses in one month can be offset by gains in another

29. Assuming equal marketings
Example Premiums, Sept. 2012
Assuming equal marketings
across the 10 months

30. LGM-Dairy Information
LGM Policy Information
LGM-Dairy Decision Tools

31. Class web site: Quiz next class, then Spring Break.
Quiz next class,
then Spring Break.