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 September 2011 & Scenario Analysis
Gene Gantz, RMA/USDA, [email protected], 717-497-6397
Graphics by Karen Powell, PA Ag Dept.show E-Mail and Phone
1
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.)
2
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!
Maximum enrollment; 24,000,000 pounds per year (7/1-6/30)
3
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
4
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
5
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
6
$16
Dairy LGM Average ten month EGM vs AGM by month purchased
EGM
AGM
$15
$14
$13
$12
$11
$10
$9
$8
*Dairy LGM was not available this month
7
7
$18.00
Expected Gross Margin (EGM) by enrollment period vs Actual Gross Margin (AGM) with zero
deductible
$17.00
$16.00
$15.00
$14.00
$13.00
$12.00
$11.00
$10.00
$9.00
$8.00
$7.00
$6.00
Aug-08 EGM/cwt
Feb-09 EGM/cwt
Aug-09 EGM/cwt
Feb-10 EGM/cwt
Aug-10 EGM/cwt
Feb-11 EGM/cwt
*Aug-11 EGM/cwt
Sep-08 EGM/cwt
Mar-09 EGM/cwt
Sep-09 EGM/cwt
Mar-10 EGM/cwt
Sep-10 EGM/cwt
Mar-11 EGM/cwt
AGM cwt
Oct-08 EGM/cwt
Apr-09 EGM/cwt
Oct-09 EGM/cwt
Apr-10 EGM/cwt
Oct-10 EGM/cwt
*Apr-11 EGM/cwt
Nov-08 EGM/cwt
May-09 EGM/cwt
Nov-09 EGM/cwt
May-10 EGM/cwt
Nov-10 EGM/cwt
*May-11 EGM/cwt
Dec-08 EGM/cwt
Jun-09 EGM/cwt
Dec-09 EGM/cwt
Jun-10 EGM/cwt
Dec-10 EGM/cwt
*June-11 EGM/cwt
Jan-09 EGM/cwt
Jul-09 EGM/cwt
Jan-10 EGM/cwt
Jul-10 EGM/cwt
Jan-11 EGM/cwt
*July-11 EGM/cwt
* Dairy LGM was not available these months
8
8
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
9
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?
10
11
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)
12
Performance Snapshot of Three Enrollment Patterns (with federal subsidy)
Using consistent milk enrollment amounts and selected monthly patterns each enrollment period (Indemnity/Premium)
Sales
Periods
Reviewed
August 2008
through
June 2010
10 year
retro active
performance
Deductibles
Scenario I
Enrollment Months
4,5, & 6; 33% each mo
Scenario II
Enrollment Months
7,8,9, & 10; 25% each mo
Scenario III
Enrollment Months
1,2,3,4,5,6,7,8,9,10; 10% ea mo
zero
2.53/1.00
1.86/1.00
2.19/1.00
$1.50
6.14/1.00
2.79/1.00
5.53/1.00
zero
1.33/1.00
1.40/1.00
1.50/1.00
$1.50
3.26/1.00
2.99/1.00
3.84/1.00
Estimates for educational purposes only provided by Alan Zepp with the PA Center for Dairy Excellence
13
If you choose less than 10 month enrollments your
safety-net may have holes in it
14
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
15
Dairy Income over Feed Cost Projections - Using RMA Dairy Gross Income Ins. Rules
Rough Est. for: Sept. 30 & Oct. 1, 2011
(Nov 2011 thru Aug. 2012 milk)
(Illustration for Educational Purposes)
The data is derived from futures and options prices from dates: 2011-09-14, 2011-09-15, 2011-09-16
Months
Available
Insured
Months
Amount
Enrolled in
Dairy GM
Gross
Margin
Calculating the Gross Margins
Est. Gross
Est.. Corn
Est .
Margin
or
Soybean
Guarantee Est, Milk Est.Total Equivlants Meal or
Covered
@0
Price
Feed
Price Equivalents
Production
Deductible (class 3
Cost
(futures)
Price
Each month
(income
futures) (futures)
@ 1/2 (futures) @
over feed
bu./cwt of 4 lbs./cwt
costs)
milk
of milk
Prices Used to calculate gross
margins
Avg. Milk
Futures
Avg. Corn
Futures
Avg.
Soybean
Meal
Futures
Feed Quantities
used to calculate
gross margins)
Covered
Covered
Soybean
Corn Equiv
Equiv
cwt/month
$/cwt
$/cwt
($)/cwt
Milk
($)
($)
($/cwt)
($/bu)
($/ton)
(Tons)
(Tons)
Nov-11
1
4.25
3.54
0.71
18.40
7.08
354.60
0.014
0.002
1
17.89
4.24
3.53
0.71
17.89
7.06
356.83
0.014
0.002
Jan-12
1
17.37
4.27
3.55
0.72
17.37
7.10
358.89
0.014
0.002
Feb-12
1
14.15
13.65
13.10
12.65
18.40
Dec-11
16.94
4.30
3.58
0.72
16.94
7.15
360.56
0.014
0.002
Mar-12
1
12.60
16.92
4.32
3.60
0.72
16.92
7.19
362.22
0.014
0.002
12.51
12.49
12.67
12.78
13.10
12.97
16.85
4.34
3.62
0.73
16.85
7.23
363.12
0.014
0.002
16.85
4.36
3.64
0.73
16.85
7.27
364.02
0.014
0.002
17.05
4.38
3.65
0.73
17.05
7.29
365.14
0.014
0.002
17.17
4.39
3.66
0.73
17.17
7.31
366.26
0.014
0.002
17.34
4.24
3.52
0.73
17.34
7.03
363.05
0.014
0.002
17.28
4.31
3.59
0.72
17.28
7.17
361.47
Apr-12
1
May-12
1
Jun-12
1
Jul-12
1
Aug-12
1
10
Total/Avg.
Avg. for 10 month
Default feed amounts used to calculation (corn: .014T.=1/2 bu, soymeal: .002T.=4 lbs. to produce 1 cwt, of milk)
The above estimated information is from the homepage of the University of Wisconsin Dairy Marketing and Risk Management Program and is
maintained 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/
LAST MONTH - August 2011 Enrollment Period (Snapshot of Expected Gross Margins per Cwt. of Milk Enrolled)
Eligible
months
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
10 mo.
Avg.
Expected
Gross
Margins
$13.55
$13.51
$13.31
$12.62
$12.41
$12.39
$12.28
$12.30
$12.36
$12.41
$12.71
16
17
Early Estimates for September Enrollment (9/30-10/1/2011) Zero Deductible; 9/14-16 futures prices used to calculate margins
Coverage
Production
Corn Equiv
Month
(cwt)
(tons)
Milk
Qty.
Month Year
100
Nov-11
Dec-11
Jan-12
C overed SBM
× Expected
Price
× Expected
Price
× Expected
Price
#NAME?
100 cwt
×
$18.40/cwt
Corn
Qty.
1.4
100 cwt
×
$17.89/cwt
100 cwt
×
$17.37/cwt
Feb-12
100 cwt
×
$16.94/cwt
Mar-12
100 cwt
×
$16.92/cwt
Apr-12
100
May-12
100
Jun-12
100 cwt
×
$16.85/cwt
= $1,684
Jul-12
Fa
rm
Co
ve
0.2tons
×
$358.89/ton
1.4tons
0.2
0.2tons
1.4tons
= $359
1.4
1.4tons
0.2
0.2tons
×
$365.14/ton
100
0.2
0.2tons
×
$366.26/ton
0.2
0.2tons
×
$363.05/ton
= $73
× $7.31/bu
= $365
1.4
1.4tons
× $7.03/bu
= $351
14 tons
14 tons
13.65
1,310
13.1
13.1
1,264
12.65
12.65
1,260
12.6
12.6
1,250
12.51
12.51
1,248
12.49
12.49
1,267
12.67
12.67
1,278
12.78
12.78
100
= $73
100
= $72
2 tons
2 tons
13.65
100
100
= $364
1.4tons
×
$363.12/ton
= $72
1,364
100
0.2tons
×
$364.02/ton
= $72
× $7.29/bu
1.4
0.2tons
14.15
100
0.2
× $7.27/bu
= $363
1.4tons
×
$362.22/ton
14.15
100
= $72
0.2
× $7.23/bu
= $361
1.4tons
0.2tons
1,414
100
= $72
0.2
$/cwt
of
Covere
d Milk
100
= $71
×
$360.56/ton
$/cwt
of
Farm
Milk
- C orn
C ost
- SBM
C ost
-
= $71
× $7.19/bu
1.4
1,000 cwt
1,000 cwt
0.2
= $357
1.4
100 cwt
×
$17.05/cwt
= $1,733
1.4tons
Monthly Gross Margin
Milk
Revenue
= $70
× $7.15/bu
1.4
100 cwt
×
$17.34/cwt
0.2tons
×
$356.83/ton
= $355
1.4
= $1,716
100
0.2
× $7.10/bu
100 cwt
×
$16.85/cwt
= $1,684
100 cwt
×
$17.17/cwt
0.2tons
×
$354.60/ton
= $353
1.4
= $1,704
100
1.4tons
%
covered
#NAME?
0.2
× $7.06/bu
= $1,691
100
1.4tons
SBM
Qty.
= $354
1.4
= $1,693
100
#NAME?
× $7.08/bu
= $1,736
100
Total
C overed
C orn
= $1,789
100
Aug-12
C overed
Milk
= $1,840
100
Soybean Meal
Equiv
(tons)
100%
1,309
GMG
12,968
13.1
13.1
12.97
12.97
The above estimated information is from the homepage of the University of Wisconsin Dairy Marketing and Risk
Management Program and is maintained by Prof. Brian W. Gould of the Dept. of Agric. and Applied Economics. It is
recommended that you use the browser: http://future.aae.wisc.edu/lgm_analyzer/
18
Summary of protection and estimated cost
Net % Net
Net
Net
Net
% GMG
GMG/cwt
Premium Prem.
Prem/cwt
GMG/cwt Prem/cwt
of
Level Premium Premium ($)
($)
of
as % change Change of Farm of Farm of Farm
Covered
($/cwt)
($)
($)
Payout of GMG
Milk
Milk
Milk
Milk
(%)
(%)
($/cwt) ($/cwt) ($/cwt) ($/cwt)
0
977
801 12,968 12,167 52
6.18
0.80
12.97 12.17 0.80
0.1
924
748 12,868 12,120 50
5.82 -6.60 -0.77
0.75
12.87 12.12
0.75
0.2
872
689 12,768 12,079 49
5.40 -13.97 -1.54
0.69
12.77 12.08
0.69
0.3
823
633 12,668 12,034 47
5.00 -20.92 -2.31
0.63
12.67 12.03
0.63
0.4
775
581 12,568 11,987 45
4.63 -27.43 -3.08
0.58
12.57 11.99
0.58
0.5
729
525 12,468 11,943 43
4.21 -34.45 -3.86
0.53
12.47 11.94
0.53
0.6
685
472 12,368 11,895 42
3.82 -41.00 -4.63
0.47
12.37 11.90
0.47
0.7
642
424 12,268 11,844 40
3.46 -47.06 -5.40
0.42
12.27 11.84
0.42
0.8
602
373 12,168 11,795 38
3.07 -53.43 -6.17
0.37
12.17 11.80
0.37
0.9
562
337 12,068 11,731 37
2.80 -57.88 -6.94
0.34
12.07 11.73
0.34
1
524
272 11,968 11,695 36
2.28 -65.95 -7.71
0.27
11.97 11.70
0.27
1.1
488
244 11,868 11,624 34
2.06 -69.54 -8.48
0.24
11.87 11.62
0.24
1.2
453
226 11,768 11,541 32
1.93 -71.70 -9.25
0.23
11.77 11.54
0.23
1.3
420
210 11,668 11,458 31
1.80 -73.75 -10.02 0.21
11.67 11.46
0.21
1.4
389
194 11,568 11,373 29
1.68 -75.71 -10.80 0.19
11.57 11.37
0.19
1.5
359
179 11,468 11,288 27
1.57 -77.55 -11.57 0.18
11.47 11.29
0.18
1.6
332
166 11,368 11,202 26
1.46 -79.28 -12.34 0.17
11.37 11.20
0.17
1.7
305
152 11,268 11,115 24
1.36 -80.92 -13.11 0.15
11.27 11.12
0.15
1.8
281
140 11,168 11,028 23
1.26 -82.46 -13.88 0.14
11.17 11.03
0.14
1.9
258
129 11,068 10,939 21
1.17 -83.90 -14.65 0.13
11.07 10.94
0.13
Deductible
Total
Subsidiz
GMG
ed
Net
GMG
Prob.
Net
GMG/cwt
of
of
Covered Covered
Milk
Milk
($/cwt) ($/cwt)
12.97 12.17
12.87
12.12
12.77
12.08
12.67
12.03
12.57
11.99
12.47
11.94
12.37
11.90
12.27
11.84
12.17
11.80
12.07
11.73
11.97
11.70
11.87
11.62
11.77
11.54
11.67
11.46
11.57
11.37
11.47
11.29
11.37
11.20
11.27
11.12
11.17
11.03
11.07
10.94
GMG/cwt
19
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.
20
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
21
22
$16
Dairy LGM Average ten month EGM vs AGM by month purchased
EGM
AGM
$15
$14
$13
$12
$11
$10
$9
$8
*Dairy LGM was not available this month
23
23
Expected Gross Margin (EGM) by enrollment period vs Actual Gross Margin (AGM) with zero deductible
$18.00
$17.00
$16.00
$15.00
$14.00
$13.00
$12.00
$11.00
$10.00
$9.00
$8.00
$7.00
$6.00
Aug-08 EGM/cwt
Feb-09 EGM/cwt
Aug-09 EGM/cwt
Feb-10 EGM/cwt
Aug-10 EGM/cwt
Feb-11 EGM/cwt
*Aug-11 EGM/cwt
Sep-08 EGM/cwt
Mar-09 EGM/cwt
Sep-09 EGM/cwt
Mar-10 EGM/cwt
Sep-10 EGM/cwt
Mar-11 EGM/cwt
AGM cwt
Oct-08 EGM/cwt
Apr-09 EGM/cwt
Oct-09 EGM/cwt
Apr-10 EGM/cwt
Oct-10 EGM/cwt
*Apr-11 EGM/cwt
Nov-08 EGM/cwt
May-09 EGM/cwt
Nov-09 EGM/cwt
May-10 EGM/cwt
Nov-10 EGM/cwt
*May-11 EGM/cwt
Dec-08 EGM/cwt
Jun-09 EGM/cwt
Dec-09 EGM/cwt
Jun-10 EGM/cwt
Dec-10 EGM/cwt
*June-11 EGM/cwt
Jan-09 EGM/cwt
Jul-09 EGM/cwt
Jan-10 EGM/cwt
Jul-10 EGM/cwt
Jan-11 EGM/cwt
*July-11 EGM/cwt
* Dairy LGM was not available these months
24
24
“It’s a program that can help a producer survive
a disaster and return to profitability!”
25