LIVESTOCK GROSS MARGIN FOR DAIRY CATTLE INSURANCE POLICY QUESTIONS AND ANSWERS
A: The Livestock Gross Margin for Dairy Cattle Insurance Policy provides
protection against the loss of gross margin (market value of milk minus feed costs)
on the milk produced from dairy cows. The indemnity at the end of the eleven-month
insurance period is the difference, if positive, between the gross margin guarantee
and the actual gross margin. The Livestock Gross Margin for Dairy Cattle Insurance
Policy uses futures prices for corn, soybean meal, and milk to determine the expected
gross margin and the actual gross margin. The price the producer receives at the
local market is not used in these calculations.
Q:
Who is eligible for the Livestock Gross Margin for Dairy Cattle Insurance Policy?
A: Any producer who owns
dairy cattle in Arizona, Colorado, Connecticut, Delaware, Illinois, Indiana, Iowa,
Kansas, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri,
Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North
Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Dakota, Tennessee, Texas,
Utah, Vermont, West Virginia, Washington, Wisconsin, and Wyoming is eligible for
Livestock Gross Margin for Dairy Cattle Insurance Policy coverage.
Q: What milk is eligible for coverage
under the Livestock Gross Margin for Dairy Cattle Insurance Policy?
A: Only milk sold for commercial
or private sale primarily intended for final human consumption from dairy cattle
fed in any of the eligible states is eligible for coverage under the Livestock Gross
Margin for Dairy Cattle Insurance Policy.
Q: What are the advantages
of the Livestock Gross Margin (LGM) policy over traditional options?
A: LGM has two advantages
over traditional options. Convenience. Producers can sign up for LGM twelve times
per year and insure all their milk production they expect to market over a rolling
eleven-month insurance period. The producer does not have to decide on the mix of
options to purchase, the strike price of the options, or the date of entry. Customization.
The LGM policy can be tailored to any size farm. Options cover fixed amounts of
commodities, and those amounts may be too large to be used in the risk management
portfolio of some farms.
Q: How is LGM different from traditional options?
A: LGM is different from
traditional options in that LGM is a bundled option that covers both the price of
milk and feed costs. The mix of target milk marketings per dairy cow and target
feed rations are supplied by the producer. This feature allows the producer to select
feed rations and production levels that best reflect their actual production situation.
The resulting bundle of options effectively insures the producer’s gross margin,
milk revenue minus feed costs, over the insurance period. LGM works as a bundle
of options that pay the difference, if positive, between the value at purchase of
the options and the value at the end of a certain time period. So, LGM would pay
the difference, if positive, between the gross margin guarantee and the actual gross
margin, as defined in the policy provisions.
Q: Can LGM be exercised?
A: No, LGM cannot be exercised
during the insurance period. LGM pays the difference, if positive, between the gross
margin guarantee and the actual gross margin, as defined in the LGM provisions,
at the end of the insurance period.
Q: Does LGM use the price the producer receives at the market?
A: No. The prices for
LGM are based on simple averages of futures contract daily settlement prices and
are not based on the prices the producer receives at the market.
Q: Does LGM make early indemnity payments?
A: Yes. If an indemnity is
due under LGM coverage, the company will send the producer a notice of probable
loss after the last month of the producer’s marketing plan. The last month
of the producer’s marketing plan is the last month in which the producer indicated
target marketings on the application.
Q: How is the underwriting capacity for LGM distributed?
A: LGM has limited underwriting
capacity that will be distributed through the Federal Crop Insurance Corporation’s
underwriting capacity manager. The underwriting capacity will be distributed on
a first come, first served basis. LGM will not be offered for sale after capacity
is full or at any time the underwriting capacity manager is not functional.
Q: When is LGM for Dairy Cattle sold and how long do the sales periods last?
A: LGM for Dairy
Cattle is sold on the last Friday that is a business day of each month. The
sales period begins as soon as RMA reviews the data submitted by the developer after
the close of markets on the last day of the price discovery period. The sales period
ends at 8:00 PM Central Time the following day. If expected milk and feed
prices are not available on the RMA website, LGM will not be offered for sale for
that insurance period.
Q: How are the feed quantities for LGM determined?
A: Producers
must supply the total number of tons of corn or corn equivalent and the tons of
protein meal or protein meal equivalent that they expect to feed for each month
in which they insure their milk.
Feed quantities are bounded.
The number of tons of corn or corn equivalent must be between
0.00364 and 0.02912 tons per hundredweight of milk.
The number of tons of protein meal or protein meal equivalent
must be between 0.000805 and 0.006425 tons per hundredweight of milk.
Default values of 0.014 tons (0.5 bushels) of corn and
0.002 tons (4 pounds) of soybean meal per hundredweight of milk can be used if producers
do not wish to choose feed amounts.
Q: How can feed equivalents be determined?
A: Producers can determine the corn and soybean meal equivalents of their
feeds. The only restriction is that the feed rates must be within the bounds previously
listed in the last question. The LGM-Dairy Commodity Exchange Endorsement contains
a table with suggested feed conversion rates. Below is an example feed conversion
based on the suggested rates.
If a producer fed 140 bushels of oats
and 0.2 tons of meat meal, he/she would need to convert these to corn and soybean
meal equivalents. The conversion for the oats can be done in two steps:
Step 1. Converting feed to tons. 140 bushels of oats X (32 pounds/1 bushel of oats)
X (1 ton/2000 pounds) = 2.24 tons
Step 2. Using the suggested conversion rates for corn and soybean meal equivalents.
2.24 tons of oats X 0.120 = 0.2688 tons of soybean meal equivalents 2.24 tons of
oats X 0.779 = 1.7450 tons of corn equivalents
The conversion for the meat meal can be done
in one step as the meat meal is already measured in tons:
Step 1. Using the suggested conversion rates for corn and soybean meal equivalents.
0.2 tons of meat meal X 1.227 = 0.2454 tons of soybean meal equivalents 0.2 tons
of meat meal X -0.349 = -0.0698 tons of corn equivalents So the corn and soybean
meal equivalents for 140 bushels of oats and 0.2 tons of meat meal are 0.5142 tons
of soybean meal (0.2688 + 0.2454) and 1.6752 tons of corn equivalent (1.7450 –
0.0698).
Feeds should be combined when creating corn and soybean
meal equivalents. Please notice that many of the protein meal feeds have negative
corn equivalent values.
Q: How are the feed costs for LGM determined?
A: Expected feed
costs for a month equal the expected corn price times the tons of corn or corn equivalent
(converted to bushels) specified by the producer for that month plus the expected
soybean meal price times the tons of protein meal or protein meal equivalent specified
by the producer for that month. Actual feed costs use actual prices for the month
and the same producer-specified quantities of feed.
Q: What types of losses are covered by LGM?
A: LGM covers the difference
between the gross margin guarantee and the actual gross margin. LGM does not insure
against dairy cattle death loss, unexpected decreases in milk production, or unexpected
increases in feed use.
Q: Where can I purchase LGM coverage?
A: LGM is available
for sale at your authorized crop insurance agent’s office. Crop insurance
agents must be certified by an insurance company to sell LGM and that agent’s
identification number must be on file with the Federal Crop Insurance Corporation.
Q: What months make up the Insurance Period?
A: The insurance period
contains the eleven months following sales closing. For example, the insurance period
for the January sales closing date contains the months of February through December.
However, coverage begins in the second month of the insurance period, so the coverage
period for this example is the months of March through December.
Q: What are the Producer’s Target Marketings
and Target Feed?
A: A determination
made by the insured as to the quantity of milk to be sold and the quantity of feed
to be fed for each month during the insurance period. Target marketings must be
less than or equal to that producer’s applicable approved target marketings
as certified by the producer. Target feed must be within the bounds that are specified
in the underwriting rules.
Q: What are the Producer’s Approved Target Marketings?
A: The producer’s
approved target marketings are the maximum amount of milk that may be stated as
target marketings on the application. Approved target marketings are certified by
the producer and are subject to inspection by the insurance company.
A producer’s approved target marketings will be the
lesser of the capacity of the producer’s dairy operation for the eleven-month
insurance period as determined by the insurance provider and the underwriting capacity
limit as stated in the special provisions.
Q: What is the Expected Corn Price?
A: For months in which
a CME Group corn contract expires, the expected corn price is the simple average
of the settlement prices for the CME Group corn futures contract for the month during
the expected price measurement period.
For other months, the expected corn price is the weighted
average of the immediately surrounding months’ simple average of the daily
settlement prices during the expected price measurement period.
The expected price measurement period is the three days
prior to and including the last Friday of the month that is a business day. (See
the Commodity Exchange Endorsement for more information.)
Prices will be released by RMA after the markets close
on the last day of the price discovery period.
Q: What is the Expected Soybean Meal Price?
A: For months in which a Chicago Board of Trade (CME Group) soybean meal
contract expires, the expected soybean meal price is the simple average of the daily
settlement prices of the CME Group soybean meal futures contract for the month during
the expected price measurement period.
For other months, the expected soybean meal price is the
weighted average of the immediately surrounding months’ simple average of
the daily settlement prices during the expected price measurement period.
The expected price measurement period is the three days
prior to and including the last Friday of the month that is a business day. (See
the Commodity Exchange Endorsement for additional information on the calculation
of the expected soybean meal price.)
Prices will be released by RMA after the markets close
on the last day of the price discovery period.
Q: What is the Expected Cost of Feed?
A: The expected cost
of feed for each month equals the target corn (or corn equivalent) to be fed times
2000/56 (to convert tons to bushels) times the expected corn price for that month,
plus the target protein meal (or protein meal equivalent) to be fed times the expected
soybean meal price for that month.
Prices will be released by RMA after the markets close
on the last day of the price discovery period.
Expected Cost of Feed for an operation that produces 1,560
cwt. of milk in a month with target feed levels of 20.5 tons of corn and 6 tons
of soybean meal: 20.5 tons x (2,000/56) x Expected Corn Price + 6 x Expected Soybean
Meal Price.
If the Expected Corn Price is $2.10 per bushel and the
Expected Soybean Meal Price is $150 per ton, expected feed costs would be $2,437.50
[20.5 x (2,000/56) x $2.10 + 6 x $150 = $2,437.50].
Q: What is the Expected Milk Price?
A: The expected milk
price is the simple average of the daily settlement prices of the CME Group Class
III milk futures contract for the month during the expected price measurement period.
The expected price measurement period is the three days prior to and including the
last Friday of the month that is a business day. Prices will be released by RMA
after the markets close on the last day of the price discovery period.
Q: What is the Expected Gross Margin per Month?
A: The expected gross
margin per month is the approved target marketings times the expected milk price
for that month less the expected feed costs for that month. Extending the above
example, if approved target marketings are 1,560 cwt. of milk for a month, the expected
milk price is $12 per hundredweight, and the expected feed cost is $2,437.50, then
the Expected Gross Margin is equal to $16,282.50 [(1,560 x $12.00) – $2,437.50
= $16,282.50].
Q: How is the expected total gross margin calculated for each insurance period?
A: The expected total
gross margin is the sum of the expected gross margins for each month of an insurance
period.
Q: How is the gross margin guarantee calculated
for each insurance period?
A: The gross margin
guarantee for each coverage period is calculated by subtracting a deductible amount
from the expected total gross margin for the applicable insurance period.
If our example producer wants a $0.10 deductible on each
of 1,560 hundredweight of milk, then the gross margin guarantee would be $16,126.50
[$16,282.50 – ($0.10 x 1,560) = $16,126.50]. The deductible is the portion
of the expected gross margin that you elect not to insure. Allowable deductible
amounts range from zero to $1.50 per hundredweight of milk in $0.10 per hundredweight
increments.
Q: What is the Actual Corn Price?
A: For months in which
a CME Group corn contract expires, the actual corn price is the simple average of
the daily settlement prices for the CME Group corn futures contract for the month
during the actual price measurement period. For other months, the actual corn price
is the weighted average of 26. A: (cont.) the immediately surrounding months’
simple average of the daily settlement prices during the actual price measurement
period. The actual price measurement period is the last three trading days prior
to contract expiration. (See the Commodity Exchange Endorsement for more information.)
Q: What is the Actual Soybean Meal Price?
A: For months in which
a CME Group soybean meal contract expires, the actual soybean meal price is the
simple average of the daily settlement prices for the CME Group soybean meal contract
for the month during the actual price measurement period. For other months, the
actual soybean meal price is the weighted average of actual soybean meal prices
in the immediately surrounding months. The actual price measurement period is the
last three trading days prior to contract expiration. (See the Commodity Exchange
Endorsement for more information.)
Q: What is the Actual Cost of Feed?
A: The actual cost of feed for each month equals the target corn to be fed
times 2,000/56 (to convert tons to bushels) times the actual corn price for that
month, plus the target soybean meal to be fed times the actual soybean meal price
for that month.
Calculation of the actual cost of feed uses the same target
corn and soybean meal to be fed as the expected cost of feed. Changes in feed rations
from these target amounts are not covered under the LGM for Dairy Cattle policy.
The actual cost of feed for an operation that produces
1,560 cwt. of milk in a month with target feed levels of 20.5 tons of corn and 6
tons of soybean meal:
20.5 tons x ((2,000/56) x Actual Corn Price)
+ (6 x Actual Soybean Meal Price). If the Actual Corn Price is $2.00 per bushel
and the Actual Soybean Meal Price is $175 per ton, actual feed costs would be $2,514.29
[20.5 x ((2,000/56) x $2.00) + (6 x $175) = $2,514.29].
Q: What is the Actual Milk Price?
A: The actual milk
price is the simple average of the daily settlement prices of the CME Group Class
III milk futures contract for the month during the actual price measurement period.
The actual price measurement period is the last three trading days prior to contract
expiration. (See the Commodity Exchange Endorsement for more information.)
Q: What is the Actual Gross Margin per Month?
A: The actual gross
margin per month is the actual marketings times the actual milk price for that month
less the actual feed costs for that month. Extending the above example, if actual
marketings are 1,560 cwt. of milk for a month, the actual milk price is $10 per
hundredweight, and the actual feed cost is $2,514.29, then the actual gross margin
is equal to $13,085.71 [(1,560 x $10.00) – $2,514.29 = $13,085.71].
Q: How is the actual total gross margin calculated?
A: The actual total
gross margin is the sum of the actual gross margins for each month of an insurance
period.
Q: How are indemnities determined?
A: Indemnities to be
paid will equal the difference between the gross margin guarantee and the actual
total gross margin for the insurance period. The producer in our example would receive
an indemnity of $3,040.79 ($16,126.50 - $13,085.71 = $3,040.79).
Q: Is a marketing report required and when should the company receive it?
A: Yes, in the event of a loss the producer must submit a marketing report
and sales receipts showing evidence of actual marketings for each month. The producer
must submit the marketing report within 15 days of receipt of notice of probable
loss.
Q: Is this a continuous policy?
A: This is a continuous
policy with twelve overlapping insurance periods per year. Target marketings must
be submitted for each insurance period. If a target marketing report is not submitted
by the sales closing date for the applicable insurance period, target marketings
for that insurance period will be zero.
Q: When must the application for insurance be turned into the company?
A: The sales closing
dates for the policy are the last Friday that is a business day for each of the
twelve calendar months. The application must be completed and filed not later than
the sales closing date of the initial insurance period for which coverage is requested.
Coverage for the milk described in the application will not be provided unless the
insurance company receives and accepts a completed application and a target marketing
report, premium is paid in full, and the insurance company sends the producer a
written summary of insurance.
Q: When does coverage begin?
A: Coverage begins
one month after the sales closing date. For example, for the January sales closing
date, coverage begins on March 1.
Q: When are the contract change dates for the policy?
A: The contract change
date is April 30. Any changes to the Livestock Gross Margin policy will be made
prior to this contract change date.
Q: When are the cancellation dates for the policy?
A: The cancellation
date is June 30 for all insurance periods.
Q: When is the end of insurance for the policy?
A: The end of insurance
for the policy is eleven months after the sales closing date. For example for the
January sales closing date, coverage ends on December 31.
Q: What deductible levels are available for the policy?
A: The producer may
select deductible levels between $0 and $1.50 per hundredweight of milk in $0.10
increments.
Q: How is the producer’s premium calculated?
A: The producer’s
premium is calculated by a premium calculator program that determines the premium
based on target marketings and expected gross margins for each period and deductibles.
Q: When is the premium for the policy due?
A: The premium for
the initial insurance period is due with the application for Livestock Gross Margin
insurance coverage. The premium for all subsequent insurance periods is due with
the target marketings report, which is due no later than the sales closing date.
Q: What portion of a producer’s milk will be insured under the policy?
A: 100 percent of a
dairy farmer’s milk can be insured under the policy.
Q: What information is required for acceptance of an application for the Livestock
Gross Margin for Dairy Cattle Insurance Policy?
A: The application
for the Livestock Gross Margin for Dairy Cattle Insurance Policy must contain all
the information required by us to insure the gross margin for the livestock or livestock
products. Applications that do not contain all social security numbers and employer
identification numbers, as applicable (except as stated in the policy), deductibles,
a target marketings report, and any other material information required to insure
the gross margin for the livestock or livestock products, will not be acceptable.
Q: Can the manager of RMA suspend LGM sales?
A: Yes. Sales of LGM
may be suspended for the next sales period if unforeseen and extraordinary events
occur that interfere with the effective functioning of the corn, soybean meal, or
milk commodity markets.
Q: What if the expected milk and feed prices are not posted on the RMA website on
the sales closing date for the month?
A: LGM will not be available
for sale for that insurance period.