Livestock Gross Margin (LGM)
Insurance Policies for Cattle
James B. Johnson and Vincent Smith
MSU Department of Agricultural Economics and Economics
Collaborating Partners
RMA Billings Regional Office
Fort Peck Community College
Riverton, Wyoming
February 23, 2009
1
Some Basics
•
First offered in 2005.
•
Premiums are subsidized: The Federal
government pays 13% of the premium.
•
Any producer who owns cattle intended to be
sold at slaughter weight is eligible to purchase
the product.
•
Calves or yearlings can be insured.
2
How Does LGM Insurance Work?
1. The product can be purchased in any month of
the year. The sales date is the last business
day of the month (the only day on which it can
be purchased).
2. Producers are insured against loss of gross
margin either because of declines in cattle
prices or increases in corn (feed) prices.
3. The insurance operates for up to11 months
from date of purchase.
3
LGM Product Basics
•
Producer is covered for up to 11 months.
– January 31:
Coverage Purchased
– December 31: Coverage Ends
•
Producer can buy insurance for more than one
insurance period.
•
The Coverage can be purchased for no more than
5,000 cattle in one insurance period.
•
The Coverage can be purchased for no more than
10,000 cattle each marketing year (July1 of the current
year – June 30 of the following year).
4
LGM Product Basics
•
For each insurance period, to claim an indemnity, a
producer must provide sales receipts proving that the
insured cattle have been marketed.
•
The LGM product relies on futures prices: producers
with LGM cannot use offsetting options positions to
simply gain the subsidy (such actions are viewed as
fraud and the producer is liable to prosecution).
•
Exact descriptions of the futures prices being used are
provided by RMA at the following URL:
http://www.rma.usda.gov/policies/2009/lgm/09lgmcattle
q&a.pdf
5
LGM Product Details
1. At the time the product is purchased, RMA
computes a producer’s expected gross margin
on a calf (or yearling) for the month in which the
producer plans to sell it (up to 11 months after
the insurance is purchased).
2. The producer insures a proportion of the
expected gross margin (up to 100% of the
margin).
6
LGM Product Details (cont.)
3.
RMA computes an estimate of the producer’s actual
gross margin in the month of sale.
4.
The producer receives a payment for loss (indemnity) if
the actual gross margin is smaller than the amount of
the expected gross margin insured by the producer.
5.
The producer can opt to take a deductible of between
$0 and $150 of the gross margin per head.
6.
The indemnity is equal to the difference between the
insured component of the expected gross margin and
the estimated gross margin.
7
A Simple Illustrative Example
•
A producer in Fremont county buys an LGM
contract for 20 calves on January 31, 2009 and
plans to market the calves in December 2009.
•
The expected December gross margin for a calf
in Fremont county on January 31 is estimated
by RMA to be $310.
•
The producer takes a deductible of $50 per
head so the insured component of the expected
gross margin is $260.
8
A Simple Illustrative Example (cont.)
•
The actual Fremont county feeder calf gross
margin is estimated by RMA at the end of
December for December sales to have been
$180.
•
For each of the 20 calves the producer receives
an indemnity of $80 (the difference between
insured component of the Expected Gross
Margin and the Actual Gross margin).
•
The total indemnity is $1,600 (20 calves x $80
per calf).
9
Calculating the Expected Gross Margin
•
RMA uses a predetermined formula for yearling
feeder cattle.
 EGMt =
Expected Gross Margin in month cattle are to
be marketed
 EPLCt =
Expected Price of Live Cattle in month
cattle are to be marketed
 EPFt-5 =
Expected price of feeder cattle 5 months
before cattle are to be marketed
 EPCt-2 =
Expected price of corn 2 months before cattle
10
are to be marketed
Expected Gross Margin:
Yearling Example
•
•
•
•
January 31:
January 31:
January 31:
January 31:
Purchase Coverage
EPLCDEC = $90
EPFCMAY = $94
EPCOCT = $3.13
EGM = 12.5 EPLCDEC – 7.50 EPFCMAY – 57.5 EPCOCT
= $1,125 - $705 - $180 = $240
11
Calculating the Actual Gross
Margin For a Jan 31 Contract
•
•
•
•
December 31: AGM
= Actual Gross Margin
December 31: PLCDEC = Price of Live Cattle in
December
December 31: PFCMAY = Price of Feeder Cattle
in May
December 31: PCOCT = Price of Corn in
October
12
Actual Gross Margin
Yearling Example
•
•
•
December 31:
December 31:
December 31:
PLCDEC = $ 86
PFCMAY = $100
PCOCT = $ 3
AGM = 12.5 PLCDEC – 7.5 PFCMAY – 57.5 PCOCT
= 12.5 (86) – 7.5 (100) – 57.5 (3)
= $152.50
13
WYOMING CATTLE YEARLING ACTUAL AND EXPECTED GROSS
MARGINS: 2008 JAN. - NOV. INSURANCE PERIOD
July
Aug
Sept
Oct
Nov
Expected
Gross
Margin
288.65
270.7
265.75
307.4
300.23
Actual
Gross
Margin
310.7
288.78
182.3
148.68
136.58
14
Who Decides What the Prices Are?
•
RMA
•
Process is defined in the contract
•
In principle, fed cattle, yearling, calf and corn prices are
county specific because RMA makes a county specific
basis adjustment from the national prices.
•
In Wyoming, all counties have the same basis adjustment
for each commodity and the basis adjustment varies by
month.
15
QUESTIONS?
16