Transcript Adjusted Gross Revenue-Lite (AGR

Dairy Gross Margin (GM)
(Milk Income over
Feed Cost)
New USDA Risk Management Tool for Dairy Producers
Over-view/concepts & illustrations
Includes est. for June 2011 & Scenario Analysis
Gene Gantz, RMA/USDA
Graphics by Karen Powell, PA Dept. of Ag.
[email protected], 717-497-6397
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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.)
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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!
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Calculation Example - Dairy Gross Margins
Expected Gross Margin - Insurance Guarantee is:
* milk enrolled (any or all milk expected to be produced; for any or all months
available) times the BOT futures price
* minus feed costs (actual ration or default ration of ½ bu. of corn and 4 lbs. of
soybean meal per cwt. of milk) valued at BOT prices (class III milk)
* Example:
$ 15.45 Milk 1 cwt. cwt (class III) for 10th (3/2010 with 4/2009 enrollment)
Minus
2.62 Feed cost for 1 cwt of milk using default ((corn=1/2 bu.@$4.18=$2.09) +
$12.83 Expected Gross Margin
(soymeal=4 lbs.@$266.30/T.=$0.53))
Actual Gross Margin - Calculated same as Expected Gross Margin but prices are
updated using futures prices for current month ((3/2010 at end of 3/2010)
$12.78 Milk 1 cwt. (class III)
2.30 Feed cost for 1 cwt. of milk ((corn=1/2 bu.@$3.57=$1.79) +
$10.48 Actual Gross Margin
(soymeal=4 lbs.@$255.77/T.=$0.51))
$2.35 loss payment per 1 cwt milk enrolled for one month
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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
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Dairy LGM - using default feed values and zero deductible purchased:
August 2008 Expected Gross Margin (EGM) vs Actual Gross Margin (AGM)
EGM/cwt
AGM/cwt
$16.00
$15.00
Expected Gross Margin
$14.00
$13.00
Coverage
$12.00
$11.00
$10.00
$9.00
$8.00
Actual Gross Margin
$7.00
$6.00
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Cumulative difference between pink and yellow lines times enrolled amount of milk is
estimated amount of indemnity (loss payment)
Jul-09
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* Dairy LGM was not available this month.
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*May-11
*Apr-11
Mar-11
Feb-11
Jan-11
Dec-10
Nov-10
Oct-10
Sep-10
Aug-10
Jul-10
Jun-10
May-10
Apr-10
Mar-10
Feb-10
Jan-10
Dec-09
Nov-09
Oct-09
Sep-09
Aug-09
Jul-09
Jun-09
EGM
May-09
Apr-09
Mar-09
$14
Feb-09
Jan-09
Dec-08
Nov-08
Oct-08
Sep-08
Aug-08
$15
Dairy LGM Average ten month EGM vs AGM by month purchased
AGM
$13
$12
$11
$10
$9
$8
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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
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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?
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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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Improved LGM DAIRY Gross Margin Insurance Program (income over Feed Cost)
Program Improvements Effective Beginning with Enrollment of December 17, 2010 include:
1. Program available in all 48 contiguous states
2. Available deductibles – from zero to $2 /cwt in $0.10/cwt intervals
3. The federal premium subsidy:
4. Premium payment due date – end of insurance period - billing the first business day after the end of the enrollment (insurance) period during which producer enrolled.
5. Maximum feed loads amounts/values increased to allow producers to include for grain, forage, young cattle and dry cow feed
Feed limit restrictions per 1 cwt of milk for calculating feed cost of DGM margin
Corn Equivalents
Bu.
Ton
Soybean Meal Equivalents
Lbs.
Ton
Feed cost comparison of different rations
Corn @
Soybean Meal@ Total Cost
$5.85 bu.
$340 ton
Minimum Limit 0.13
0.0036
1.61
0.0008
$0.76
$0.27
$1.03
New Max. Limit 1.36
0.0381
26.00
0.013
$7.96
$4.42
$12.38
Default
0.014
4.00
0.002
$2.93
$0.68
$3.61
0.50
For details contact crop insurance agent (list available @ http://www3.rma.usda.gov/apps/agents/)
Rev.12-31-2010
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Early Estimates for March Enrollment (3/25 &26, 2011) Zero Deductible; 3/2-3/4 futures prices used to calculate Gross Margins
The above estimated information is from the homepage of the University of Wisconsin Dairy Marketing and Risk
Management Program and ismaintained 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/
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Summary of protection and cost, etc.
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Expected Margins on February 16,17,&18 vs
10 Year Average of Actual Margins
$15.00
$14.00
/cwt
$13.00
$12.00
$11.00
$10.00
$9.00
$8.00
April
May
June
July
Aug
10 Year Monthly Average Actual Margin
Sept
Oct
Nov
Dec
Jan
Feb
Expected Margins on February 16,17,& 18
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* Dairy LGM was not available this month.
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*May-11
*Apr-11
Mar-11
Feb-11
Jan-11
Dec-10
Nov-10
Oct-10
Sep-10
Aug-10
Jul-10
Jun-10
May-10
Apr-10
Mar-10
Feb-10
Jan-10
Dec-09
Nov-09
Oct-09
Sep-09
Aug-09
Jul-09
Jun-09
EGM
May-09
Apr-09
Mar-09
$14
Feb-09
Jan-09
Dec-08
Nov-08
Oct-08
Sep-08
Aug-08
$15
Dairy LGM Average ten month EGM vs AGM by month purchased
AGM
$13
$12
$11
$10
$9
$8
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Is $10 corn a possibility?
James Dunn
Pennsylvania State University
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Consider it Now
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Reasons to Buy - Dairy Gross Margins Insurance (DGM)
1. Establish monthly safety-net
2.
3.
4.
5.
6.
7.
8.
- develop and implement a financial safety-net
for your business plan for the year ahead, with protection the last 10 months of each 12
month enrollment period. Enrollment periods are last business Friday and following day
each month (likely exception, 3rd business Friday and next day in Nov. & Dec.).
Enrollment pattern - the best performing enrolling strategy favors a consistent
amount of milk being enrolled each month of each enrollment period. Estimated benefit
cost ratios are 1.50 @ zero and 3.84 at $1.50 per cwt deductible, when following this
pattern over the past 10 years.
Reduce feed piece volatility risk - DGM provides protection from increased
feed prices when milk prices do not have a corresponding increase.
Premium subsidy and time of payment - if enrollment is for two or more
months and not billed until end of insurance (enrollment) period.
If you can accurately predict futures prices - enroll in DGM at a low
cost, good performing, higher deductible so that you are protected if the futures prices do
not follow your expectations.
Apply savings from CWT program – 2011 contributions dropped from 10
to 2 cents, apply the 8 cent per cwt cost reduction to purchase a dairy risk management
plan.
Create improved MILC program – appropriate amounts of milk enrollment
in DGM may be used to function similar to MILC payments.
Acquire increased loan security – DGM can increase you loan security to
improve your credit worthiness. Indemnities are assignable.
Summary:
* DGM pays when you receive less from the marketplace than the
gross margin guarantee. The market place also pays more
timely
* Having a reliable risk management plan protects the business,
your family, and your good stewardship.
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Expected BOT Prices
Determined
Producer feed Inputs
Target milk marketings
(All or part of your milk)
Expected Gross Margin
(ins. guarantee)
Minus
Actual Gross Margin
=
Indemnity
How
Dairy
GM
Works
Expected
Gross Margin
(Ins. Guarantee)
Actual Gross
Margin is
Calculated
Actual BOT Prices
Determined
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Improved LGM DAIRY Gross Margin Insurance Program (income over Feed Cost)
Program Improvements Effective Beginning with Enrollment of December 17, 2010 include:
1. Program available in all 48 contiguous states
2. Available deductibles – from zero to $2 /cwt in $0.10/cwt intervals
3. The federal premium subsidy:
4. Premium payment due date – end of insurance period - billing the first business day after the end of the enrollment (insurance) period during which producer enrolled.
5. Maximum feed loads amounts/values increased to allow producers to include for grain, forage, young cattle and dry cow feed
Feed limit restrictions per 1 cwt of milk for calculating feed cost of DGM margin
Corn Equivalents
Bu.
Ton
Soybean Meal Equivalents
Lbs.
Ton
Feed cost comparison of different rations
Corn @
Soybean Meal@ Total Cost
$5.85 bu.
$340 ton
Minimum Limit 0.13
0.0036
1.61
0.0008
$0.76
$0.27
$1.03
New Max. Limit 1.36
0.0381
26.00
0.013
$7.96
$4.42
$12.38
Default
0.014
4.00
0.002
$2.93
$0.68
$3.61
0.50
For details contact crop insurance agent (list available @ http://www3.rma.usda.gov/apps/agents/)
Rev.12-31-2010
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Sample enrollment periods (8/08, 1/09/8/09,1/10) used to compare the impact of
Default, Min. and Max. feed allowed rations on Expected and Actual gross margins
$15
Dairy LGM Average ten month EGM vs AGM by month purchased
$14
EGM
AGM
$13
$12
$11
$10
$9
* Dairy LGM was not available this month.
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*May-11
*Apr-11
Mar-11
Feb-11
Jan-11
Dec-10
Nov-10
Oct-10
Sep-10
Aug-10
Jul-10
Jun-10
May-10
Apr-10
Mar-10
Feb-10
Jan-10
Dec-09
Nov-09
Oct-09
Sep-09
Aug-09
Jul-09
Jun-09
May-09
Apr-09
Mar-09
Feb-09
Jan-09
Dec-08
Nov-08
Oct-08
Sep-08
Aug-08
$8
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“It’s a program that can help a producer survive
a disaster and return to profitability!”
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