Dairy LGM Now Available in 36 states

The LGM Dairy plan of insurance:

-  Kentucky, New Mexico, Tennessee and Washington added for 2010

-  approved by the FCIC Board of Directors

-  federally reinsured dairy insurance

-  administrative costs covered by RMA

-  508(h) Submitter:

o  Dr. Bruce Babcock & Iowa Agricultural Insurance Innovations, L.L.C. (IAII)

Dairy-LGM UPDATES

July, 2009

USDA approved a dairy insurance program is available in 36 states. This is an additional risk management tool for dairy producers to consider. The states are AZ, CO, CT, DE, IA, IL, IN, KS, KY, MA, MD, ME, MN, MI, MO, MT, ND, NE, NH, NJ, NM, NV, NY, OH, OK, PA, RI, SD, TN, TX, UT, VT,WA, WI, WV, WY.

The program is based on milk income over feed costs, which the program calls a “gross margin.” The insurance program covers the difference between the expected gross margin (insurance guarantee) and the actual gross margin for the producer’s selected month(s), for a targeted amount of milk.

Futures prices from the Chicago Mercantile Exchange (CME) are used to determine the value of milk and feed, using futures prices results in uniform commodity pricing for the insurance program for all producers.

The expected gross margin is determined by using the producer’s estimated hundredweights of milk times the futures price for a selected month or months time period. Feed costs are calculated by determining the expected amount of feed to be fed (RMA established or producer actual) during the same time period. These quantities of feed are converted into shelled corn and soybean meal equivalents and multiplied by the CME prices for the selected period.

The actual gross margin is calculated for the same time period as the expected gross margin. The calculations are done using the same methodology as was used to calculate the expected gross margin.

Cause of loss covered is the difference between the expected gross margin (insurance guarantee) and the actual gross margin. It does not insure against death or other cause of production loss or damage to the producer’s dairy cattle. It does not insure expected price changes which are already reflected in BOT futures prices.

An insurance indemnity (loss payment) results when the expected gross margin exceeds the actual gross margin. In the chart below, payments could have occurred March through July if any of these months had been selected as the months for which insurance had been purchased.

Enrollment Periods. Twelve enrollment periods are expected to be available each calendar year (one each month January through December). The last 10 months of each enrollment period is when insurance is available. Producer can elect to insure during selected or all 10 months in each period.

The dairy GM program offers producers two advantages over traditional options: convenience as producers can enroll 12 times per year; and it also offers customization as the insurance policy can be tailored to any size farm.

·  Some improvements that will simplify the program

o  Ability to use default feed rather the providing your own and converting

o  Extended enrollment period: last business Friday of the month to 9pm following day.

Mechanics of Dairy Gross Margins

Overview:

LGM for dairy, insures the difference between the price received for Class III milk (output) and the cost of corn and soybean meal (inputs). LGM-Dairy is sold monthly, beginning at the close of business on the last business Friday day of the month and ending at 9 pm ET the following day. Producers provide the amount of milk expected to be marketed for each month of the insurance period. Price discovery is determined using futures settlement prices at the Chicago Mercantile Exchange (CME). LGM-Dairy offers the following features:

* Uses CME Class III milk futures contract, CME corn and soybean meal futures contracts. (Producers select amount of corn input and soybean meal input.);

* 11 month contract, first month is blacked out (10 insurance months);

* Uses National Agricultural Statistics Service (NASS) data to establish basis for milk and corn;

* Allows producers to pick dollar denominated deductible from $0-$1.50 in $.10 increments.

Some useful websites:

www.rma.usda.gov

http://future.aae.wisc.edu

www.centerfordairyexcellence.org

Policies to Date

State / Pol / Pol / Units / Number / Liabilities / Total / Indemnity / Loss
Sold / Indem / Indem / of cwt / Premium / Ratio
IOWA / 1 / 1 / 1 / 42,000 / 628,440 / 35,542 / 115,452 / 3.25
INDIANA / 1 / 1 / 1 / 644 / 7,477 / 288 / 1,451 / 5.04
MICHIGAN / 1 / 0 / 0 / 0 / 0 / 0 / 0 / 0
MINNESOTA / 3 / 0 / 0 / 33,960 / 376,262 / 17,241 / 0 / 0
MONTANA / 15 / 0 / 0 / 172,350 / 1,841,440 / 110,059 / 0 / 0
N. DAKOTA / 1 / 0 / 0 / 13,353 / 220,859 / 4,066 / 0 / 0
NEW YORK / 1 / 0 / 0 / 0 / 0 / 0 / 0 / 0
OHIO / 1 / 1 / 1 / 2,000 / 28,400 / 1,261 / 7,045 / 5.59
PENNSYLVANIA / 5 / 2 / 2 / 26,250 / 349,018 / 18,967 / 20,120 / 1.06
S. DAKOTA / 4 / 0 / 0 / 6,246 / 63,332 / 2,523 / 0 / 0
WISCONSIN / 12 / 2 / 2 / 104,877 / 1,200,630 / 97,254 / 10,527 / 0.11
Grand Total: / 45 / 7 / 7 / 401,680 / 4,715,858 / 287,201 / 154,595 / 0.54

The following example(s) are based on milk and feed inputs of:

1560 cwt of milk per month

20.5 tons of corn per month

6 tons of soybean meal per month

This could be interpreted as a 94 cow dairy with a 20,000 lb/cow herd average

Premium/cwt by Month purchased and deductible

Deductible Level ($/cwt) / $/cwt Aug. 2008 / $/cwt Sept. 2008 / $/cwt Oct. 2008 / $/cwt Nov. 2008 / $/cwt Dec. 2008 / $/cwt Jan. 2009 / $/cwt Feb. 2009 / $/cwt Mar. 2009 / $/cwt Apr. 2009 / $/cwt May 2009 / Prem/cwt ($/cwt) / Ave $/cwt
$0.00 / 0.83 / 0.91 / 0.76 / 0.84 / 0.76 / 0.76 / 0.75 / 0.91 / 0.87 / 0.86 / 0.93 / 0.92
$0.10 / 0.77 / 0.85 / 0.71 / 0.79 / 0.71 / 0.71 / 0.70 / 0.86 / 0.82 / 0.80 / 0.87 / 0.86
$0.20 / 0.73 / 0.80 / 0.66 / 0.73 / 0.66 / 0.66 / 0.65 / 0.81 / 0.77 / 0.75 / 0.82 / 0.80
$0.30 / 0.68 / 0.75 / 0.61 / 0.69 / 0.61 / 0.61 / 0.60 / 0.76 / 0.72 / 0.71 / 0.76 / 0.75
$0.40 / 0.63 / 0.71 / 0.57 / 0.64 / 0.56 / 0.57 / 0.55 / 0.71 / 0.67 / 0.66 / 0.71 / 0.70
$0.50 / 0.59 / 0.66 / 0.52 / 0.59 / 0.52 / 0.52 / 0.51 / 0.67 / 0.63 / 0.61 / 0.66 / 0.65
$0.60 / 0.55 / 0.62 / 0.48 / 0.55 / 0.48 / 0.48 / 0.47 / 0.62 / 0.59 / 0.57 / 0.62 / 0.60
$0.70 / 0.51 / 0.58 / 0.45 / 0.51 / 0.44 / 0.44 / 0.43 / 0.58 / 0.55 / 0.53 / 0.57 / 0.56
$0.80 / 0.47 / 0.54 / 0.41 / 0.47 / 0.40 / 0.41 / 0.39 / 0.54 / 0.51 / 0.49 / 0.53 / 0.52
$0.90 / 0.43 / 0.50 / 0.37 / 0.44 / 0.37 / 0.37 / 0.36 / 0.51 / 0.47 / 0.46 / 0.49 / 0.48
$1.00 / 0.40 / 0.46 / 0.34 / 0.40 / 0.34 / 0.34 / 0.33 / 0.47 / 0.44 / 0.42 / 0.45 / 0.44
$1.10 / 0.37 / 0.43 / 0.31 / 0.37 / 0.31 / 0.31 / 0.30 / 0.44 / 0.40 / 0.39 / 0.42 / 0.40
$1.20 / 0.34 / 0.40 / 0.28 / 0.34 / 0.28 / 0.28 / 0.27 / 0.40 / 0.37 / 0.36 / 0.38 / 0.37
$1.30 / 0.31 / 0.37 / 0.26 / 0.31 / 0.25 / 0.25 / 0.24 / 0.37 / 0.34 / 0.33 / 0.35 / 0.34
$1.40 / 0.29 / 0.34 / 0.23 / 0.28 / 0.23 / 0.23 / 0.22 / 0.34 / 0.31 / 0.30 / 0.32 / 0.31
$1.50 / 0.26 / 0.31 / 0.21 / 0.26 / 0.20 / 0.21 / 0.20 / 0.31 / 0.29 / 0.27 / 0.29 / 0.28
average / 0.51 / 0.58 / 0.45 / 0.51 / 0.44 / 0.45 / 0.44 / 0.58 / 0.55 / 0.53 / 0.57 / 0.56

The following examples utilized the program from Wisconsin to generate the figures. Theses examples all use the same milk to feed ratio. Your individual margins may vary as your milk to feed ratio may very well be different. These examples are for illustrative purposes only and can help determine the effect of the deductible on the event of a payout. Keep in mind; you can not determine if there is a payout on these policies until the insurance period (what the insured selects, 1-10 months) is complete. This is just an indication of how it is tracking so far.

The following example is showing how the 10 month expected gross margin (EGM) has changed depending on the month the policy was purchased vs. how the actual gross margin (AGM) is coming in.

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