1. LGM-Dairy Analyzer An Integrated Software System for Use with LGM-Dairy Brian W. Gould Department of Agricultural and Applied Economics Victor E. Cabrera Department of Dairy Science University of Wisconsin-Madison University of Wisconsin Extension June, 2011

2.  Provide an overview of the University of Wisconsin LGM-Analyzer software system  Overview of supporting website  Review of the software system  Present a simple LGM-Dairy example  Downloading the example farm Excel file  Updating the analysis reported here  Answer any questions with respect to modeling a particular contract Overview of This Portion of the Presentation 2

3. 3 Website Address: http://future.aae.wisc.edu LGM-Dairy Section

4. 4 Bundled Options UW Understanding Dairy Markets Database System LGM Dairy Insurance System Rules http://future.aae.wisc.edu/lgm_analyzer/ UW LGM-Dairy Integrated Software System UW Feed Converter IOFC Estimator Actual Contract Performance Least-Cost Contract Least-Cost Contract Premium Estimator Premium Estimator LGM-Dairy Analyzer

5. 5  Wisconsin’s LGM-Dairy  Wisconsin’s LGM-Dairy Premium Estimator  Historical and Forward looking web-based premium calculator system Forward lookingses previous 3 days futures and options data to estimate next month’s LGM-Dairy premiums Forward looking: Uses previous 3 days futures and options data to estimate next month’s LGM-Dairy premiums Historical: Uses actual premium data to provide actual premiums and indemnities (if any) Historical: Uses actual premium data to provide actual premiums and indemnities (if any)  Note: User supplies desired contract design UW LGM-Dairy Integrated Software System

6. 6 Bundled Options UW Understanding Dairy Markets Database System LGM Dairy Insurance System Rules UW LGM-Dairy Integrated Software System UW Feed Converter IOFC Estimator Actual Contract Performance Least-Cost Contract Least-Cost Contract Premium Estimator Premium Estimator LGM-Dairy Analyzer

7. 7  Wisconsin’s LGM-Dairy Least-Cost Optimization web-based software system  Identifies least-cost contract to achieve desired IOFC (GMG) for All Farm milk Set target net (of premium and subsidy) IOFC for All Farm milk Set target net (of premium and subsidy) IOFC for All Farm milk Insured milk cwt probably less than All Farm cwt Insured milk cwt probably less than All Farm cwt  Historical and Forward-Looking analyses  User supplies desired net IOFC for All Farm milk Program designs the plan given target net IOFC Program designs the plan given target net IOFC UW LGM-Dairy Integrated Software System

8. 8 Bundled Options UW Understanding Dairy Markets Database System LGM Dairy Insurance System Rules UW LGM-Dairy Integrated Software System UW Feed Converter IOFC Estimator Actual Contract Performance Least-Cost Contract Least-Cost Contract Premium Estimator Premium Estimator LGM-Dairy Analyzer

9. 9  Wisconsin’s LGM-Dairy Actual Contract Performance web-based software system  Historical analysis: Determines what actually would have happened if a particular contract had been purchased Actual premium data used Actual premium data used  Future indemnity estimation: Analyzing a contract that is not yet complete Actual price data used for future contracts months that have expired Actual price data used for future contracts months that have expired Previous day’s futures contract settlement data used to represent actual data that does not exist Previous day’s futures contract settlement data used to represent actual data that does not exist UW LGM-Dairy Integrated Software System

10. 10 Bundled Options UW Understanding Dairy Markets Database System LGM Dairy Insurance System Rules UW LGM-Dairy Integrated Software System UW Feed Converter IOFC Estimator Actual Contract Performance Least-Cost Contract Least-Cost Contract Premium Estimator Premium Estimator LGM-Dairy Analyzer

11. 11  Wisconsin’s LGM-Dairy Bundled Options Evaluator  How does LGM-Dairy cost compare with bundled options strategy providing similar protection Realistic as fixed options contract sizes recognized Realistic as fixed options contract sizes recognized Speculation not allowed to determine options purchase Speculation not allowed to determine options purchase Still in development Still in development  Historical and Future contract analyses can be evaluated similar to previous modules UW LGM-Dairy Integrated Software System

12. LGM-Dairy: A Simple Example 12  Farm characteristics  300 milk cows w/24,000 lbs whole herd average  Estimate premium costs for June 2011 contract  For simplicity we assume 2,000 lbs/cow/month  Expected feed use over 10 months: 840 tons Corn Eq. 120 tons SBM Eq. 840 tons Corn Eq. 120 tons SBM Eq.  Contract defined by % coverage and deductible  50% of milk over Aug-Dec 2011  Base example: $1.00 Deductible

13.  File can be downloaded from the following http://future.aae.wisc.edu/lgm-dairy/WAAE_example.csv  What are the trade-offs between deductible level, GMG and net (of subsidy) premium?  In this case there is substantial difference between farm vs. insured production  5-Month Farm production: 30,000 cwt  5-Month Insured production: 15,000 cwt  What are premium and GMG values per cwt for both production measures? 13 LGM-Dairy: A Simple Example

14. Select Program to Use Use Previously Saved Farm Data Method for Entering Feed Select Deductible Identify Contract to Analyze Displayed if looking forward Displayed if looking forward

15. Help System Help on Specific Topics

17. 17 50% Allocation Results, $1 Deductible LGM-Dairy: Example Premium Estimation

18. 18 50% Subsidy ↑ Subsidy w/↑ Deductible ↑ Subsidy w/↑ Deductible Note Difference in Values

19. 19 Farm Milk Covered Milk Base Analysis Base Analysis

20. 20 Contact Information  Univ. of Wisconsin Dairy Marketing Website: http://future.aae.wisc.edu  Livestock Gross Margin Insurance: http://future.aae.wisc.edu/lgm_dairy.html  To join the LGM-Dairy Mailing List: http://future.aae.wisc.edu/lgm_dairy.html#5  Brian W. GouldVictor E. Cabrera (608)263-3212(608)265-8506 bwgould@wisc.eduvcabrera@wisc.edu