Analysis of Alternative LGM-Dairy
Contracts: A Wisconsin Case-Study
Brian W. Gould
Department of Agricultural and Applied Economics
University of Wisconsin-Madison
University of Wisconsin Extension
November 25, 2013
LGM-Dairy Website
Website Address: http://future.aae.wisc.edu
UW LGM-Dairy Integrated Software System
UW Understanding
Dairy Markets
Database System
LGM-Dairy Insurance
System Rules
LGM-Dairy Tutorial
LGM-Dairy Analyzer
UW Feed Converter
Premium
Estimator
Least-Cost
Contract
IOFC Estimator
Bundled
Options
Actual Contract
Performance
http://future.aae.wisc.edu/lgm_analyzer/
5
Use of the UW LGM-Dairy Analyzer
 Let's look at how one can use the LGMDairy Analyzer (Premium Estimator)
 Can look forward to next two contracts or
historically to previous periods
 Historical analysis based on actual data used
to determine LGM-Dairy premiums
 Future analysis can look 1 or 2 months in
advance
 Based on futures/options data available on the
date when the analysis is undertaken
6
Structure of the LGM-Dairy Premium Estimator
Production, Feed
Equiv., Coverage %,
Deductible
Previously
Entered Data
Futures and
Options Data
Select Premium
Estimator
Input Form
Choose Date of
Contract Offering
Save to
Excel File
Premium
Estimation
Summary
Table
Indemnity
Sensitivity Analysis
Premium
Sensitivity Analysis
Indemnity
Determination
Historical Analysis?
YES
NO
7
LGM-Dairy: A Wisconsin Case Study
 Farm characteristics




500 milk cows
Purchase October 2010 contract
Cover a portion of Mar – Jun 2011 margin
20,820 lb/cow annual whole herd average
 Contract defined by monthly % insured
 44% of March - June production insured
Oct
′10
Purchase
Nov
′10
No
Cover
-age
Percent
Insured
Dec
′10
Jan
′11
Feb
′11
Mar
′11
1
2
3
4
Apr May
′11
′11
5
6
Jun
′11
Jul
′11
Aug
′11
Sep
′11
7
8
9
10
Insurance Contract Period
75% 50% 25% 25%
2
8
LGM-Dairy: A Wisconsin Case Study
 Contract defined by contract deductible
 Base example deductible: $1.00/cwt TEGM
 Contract defined by declared feed use
Initial Ration
 Two feed use assumptions
 Ration 1: Declare 100% of corn and SBM equiv.
 Ration 2: Declare only purchased feed
• No corn silage
• 25% of SBM equiv. met from own supplies
Files can be downloaded from the following
future.aae.wisc.edu/lgm-dairy/wisc/WI_ration1_badgerland.csv
future.aae.wisc.edu/lgm-dairy/wisc/WI_ration2_badgerland.csv
9
LGM-Dairy: A Wisconsin Case Study
Total Feed Quantity
Month
(2011)
Mar
Apr
May
Jun
4-Mo.
Yield per
Milk
Feed Ration 1
Feed Ration 2
Cow Marketings
Corn Eq. SBM Eq. Corn Eq. SBM Eq.
(#/mth)
(cwt)
(T/mth) (T/mth) (T/mth) (T/mth)
1,851
1,814
1,879
1,796
1,835
9,255
9,070
9,395
8,980
9,175
194.1
187.9
194.1
187.9
764.0
109.1
105.5
109.1
105.5
429.2
117.5
113.7
117.5
113.7
462.4
77.6
75.1
77.6
75.1
305.4
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LGM-Dairy: A Wisconsin Case Study
Oct 2010 Expected
Prices
Month
Mar-11
Apr-11
May-11
Jun-11
Average
Class III
($/cwt)
Corn
($bu)
14.16
14.15
14.13
14.35
14.20
5.92
5.95
5.98
6.00
5.96
Actual Prices
Actual – Expected
Prices
SBM Class III Corn SBM Class III Corn
($/ton) ($/cwt) ($bu) ($/ton) ($/cwt) ($bu)
339
339
339
339
339
19.45
16.80
16.53
19.23
18.00
6.77
6.81
6.86
6.94
6.85
348
347
347
348
348
5.29
2.65
2.40
4.88
3.81
0.85
0.86
0.88
0.94
0.88
SBM
($/ton)
8.63
8.21
7.80
8.85
8.37
 Average Actual − Expected % differences:
 Class III: +26.8%
 Corn:
+14.8%
 SBM:
+2.5%
11
12
October 2010 Contract Sales Date
13
LGM-Dairy: A Wisconsin Case Study
Upload previously saved data
Select Year and Month
Select Deductible
This allows you to enter feed manually
14
15
LGM-Dairy: A Wisconsin Case Study
Note the difference between
Farm milk vs. Covered milk
Save all calculations
to a spreadsheet file
16
17
18
LGM-Dairy: A Wisconsin Case Study
 With Oct. 2010 contract completed all
actual prices known by end of July 2011
 June is last covered month
 Software is smart enough to know which
actual prices exist and evaluate actual
indemnity
 If at least 1 actual price is known (but not
all) an estimate of the indemnity status will
be generated
 For those months with no actual prices,
previous days futures used as an estimate
19
LGM-Dairy: A Wisconsin Case Study
20
Note: The TAGM was $146,204. The difference
between the TAGM and TGMG was $66,407, much
greater than the $4,293 subsidized premium paid.
21
Net Premiums Under Alternative Deductibles
0.80
0.70
Net Premium (Insured Milk)
0.60
Net Premium (Farm Milk)
Net Premium = Premium – Subsidy
$/cwt
0.50
•
•
0.40
Oct. ′10 contract purchase
Cover portion of Mar-Jun ′11 margins
0.30
0.20
0.10
0.00
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
22
Net TGMG Under Alternative Deductibles
• Oct. ′10 contract purchase
• Cover portion of Mar-Jun ′11 margins
5.10
4.90
$/cwt
4.70
4.50
4.30
4.10
Net TGMG = TGMG – Net Premium
= TGMG – Premium – Subsidy
3.90
3.70
3.50
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
23
LGM-Dairy: A Wisconsin Case Study
 Let’s compare the above results obtained
where all feed is converted to corn and
SBM equivalents to the same contract but
different feed use
 Use ration #2 where all corn silage and 25%
of SBM equivalent not declared
 Same amount of milk insured as in ration 1
24
LGM-Dairy: A Wisconsin Case Study
 Lets compare Ration 1 vs. Ration 2
TGMG
Net Premium
Net TGMG
Ration
1
Ration
2
76,797
123,304
4,293
3,343
72,504
119,961
$ Per CWT
Insured Milk
4.78
7.67
0.27
0.21
4.51
7.46
$ Per CWT
Farm Milk
2.09
3.36
0.12
0.09
2.09
3.27
Total $
Ration Ration Ration
1
2
1
Ration
2
 Note how with Ration 2, the TGMG ↑
while the premium ↓ compared to Ration 1
25
Comparison of Net TGMG’s
8.25
7.75
$/cwt
7.25
6.75
Ration 1
6.25
Ration 2
5.75
•
•
5.25
Oct. ′10 contract purchase
Cover portion of Mar-Jun ′11 margins
4.75
4.25
Net TGMG = TGMG – Net Premium
= TGMG – Premium – Subsidy
3.75
3.25
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
26
Were There Indemnities?
 Under both rations
for the Oct. 2010
contracts there were no indemnities due to:
 Significantly higher Class III milk prices
 Relatively small increases in feed costs
 As an alternative we will examine
purchasing an October 2008 contract
 Use same rations as before
 Assume same milk production
 Only difference is with respect to expected
and actual prices
27
October 2008 Contract Sales Date
28
29
LGM-Dairy: A Wisconsin Case Study
Expected Prices
Month
Actual Prices
% Change
Class
Class
Class
Corn SBM
Corn SBM
Corn SBM
III
III
III
($/bu) ($/Ton)
($/bu) ($/Ton)
($/bu) ($/Ton)
($/cwt)
($/cwt)
($/cwt)
Mar '09 14.53 4.28
285
10.46
3.67
284
-28.0 -14.3 -0.5
Apr '09 14.77 4.34
287
10.76
3.92
326
-27.1 -9.7
13.9
May '09 14.86 4.40
288
9.83
4.17
369
-33.8 -5.2
28.1
Jun '09 15.24 4.45
290
9.94
3.83
368
-34.8 -13.9 27.2
Average 14.85 4.37 287.50 10.25
3.90 336.75 -30.9 -10.8 17.2
October 2008 Contract Offering
30
LGM-Dairy: A Wisconsin Case Study
 Let’s compare contract costs of 2008 vs.
2010 (Ration 1)
TGMG
2010
2008
Net
Premium
2010 2008
Net TGMG
2010
2008
Total $ 76,797 115,045 4,293 5,028 72,504 110,016
$ Per CWT
4.78
7.16
0.27 0.31
4.51
6.85
Insured Milk
$ Per CWT
2.09
3.13
0.12 0.14
1.98
3.00
Farm Milk
31
LGM-Dairy: A Wisconsin Case Study
 Lets compare 2008 vs. 2010 (Ration 1)
Indemnity
2010 2008
Total $
0
54,336
$ Per CWT
0
3.38
Insured Milk
$ Per CWT
0
1.48
Farm Milk
Net Indemnity
2010
2008
-4,293 49,307
-0.27
3.07
-0.12
1.34
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LGM-Dairy: A Wisconsin Case Study
 Lets compare 2008 vs. 2010 (Ration 2)
TGMG
Net
Premium
Net TGMG
2010
2008
2010 2008
2010
Total $ 123,304 151,093 3,343 4,200 119,961
$ Per CWT
Insured 7.67
9.40
0.21 0.26
7.46
Milk
$ Per CWT
3.36
4.12
0.09 0.11
3.27
Farm Milk
2008
146,894
9.14
4.00
33
LGM-Dairy: A Wisconsin Case Study
 Lets compare 2008 vs. 2010 (Ration 2)
Indemnity
Total $
$ Per CWT
Insured Milk
$ Per CWT
Farm Milk
2010
0
Net Indemnity
2008
2010 2008
54,902 -3,343 50,702
0
3.42
-0.21
3.16
0
1.50
-0.09
1.38
34
LGM-Dairy: A Wisconsin Case Study
 Ration impacts on 2008 covered milk net indemnities
3.80
3.60
3.40
$/cwt
3.20
3.00
2.80
Ration 1
2.60
Ration 2
2.40
2.20
2.00
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
35
LGM-Dairy: A Wisconsin Case Study
 The previous analyses were looking at
historical data
 In the next example we want to obtain
an estimate of the costs of a November
2013 contract
 Unlike historical analysis we do not
know expected prices
36
LGM-Dairy: A Wisconsin Case Study
 The LGM-Analyzer uses the most recent 3
days of futures and options when expected
prices are not known
 The closer one gets to actual contract purchase
date, → more accurate premium estimates
37
LGM-Dairy: A Wisconsin Case Study
Expected Prices
2013-2014
Month
2010-11
2008-2009
Class Corn SBM Class Corn SBM Class Corn SBM
III
($/bu) ($/Ton) III
($/bu) ($/Ton) III ($/bu) ($/Ton)
($/cwt)
($/cwt)
($/cwt)
Mar 16.75 4.32
398
14.16 5.92
Apr 16.73 4.36
394
14.15 5.95
May 16.68 4.39
392
14.13 5.98
Jun 16.82 4.43
390
14.35 6.00
339 14.53 4.28 285
339 14.77 4.34 287
339 14.86 4.40 288
339 15.24 4.45 290
Average
Note: 2013-2014 expected prices obtained from an analysis
undertaken on November 22nd
38
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40
LGM-Dairy: A Wisconsin Case Study
TGMG
2013
2010
Net Premium
2008
2013
2010
Net TGMG
2008
2013
2010
2008
Ration 1
Total $ 126,278
76,797
115,045
2,475
4,293 5,028 123,803 72,504 110,016
$/cwt Insured
Milk
7.86
4.78
7.16
0.15
0.27
0.31
7.70
4.51
6.85
$/cwt Farm
Milk
3.44
2.09
3.13
0.07
0.12
0.14
3.37
1.98
3.00
Ration 2
Total $ 168,327
123,304
151,093
2,183
3,343
4,200 166,144 119.961
146,894
$/cwt Insured
Milk
10.47
7.67
9.40
0.14
0.21
0.26
10.34
7.46
9.14
$/cwt Farm
Milk
4.59
3.36
4.12
0.06
0.09
0.11
4.53
3.27
4.00
41
LGM-Dairy: A Wisconsin Case Study
Net Premium as % of TGMG
Net Premium as % of TGMG
7.00
6.00
Ration 1
5.00
Ration 2
4.00
•
•
3.00
Nov. ′13 contract purchase
Cover portion of Mar-June ′14 margins
2.00
1.00
0.00
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
42
LGM-Dairy: A Wisconsin Case Study
Net TGMG Under Alternative Rations
11.25
10.50
•
•
$/cwt
9.75
Nov. ′13 contract purchase
Cover portion of Mar-June ′14 margins
9.00
Net TGMG = TGMG – Net Premium
= TGMG – Premium – Subsidy
8.25
7.50
Ration 1
Ration 2
6.75
6.00
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
43
Contact Information
 The Univ. of Wisconsin Dairy Marketing Website:
http://future.aae.wisc.edu
 Livestock Gross Margin Insurance:
http://future.aae.wisc.edu/lgm_dairy.html
 To join the LGM-Dairy Mailing List:
http://future.aae.wisc.edu/lgm_dairy.html#5
 Brian W. Gould
(608)263-3212
bwgould@wisc.edu
44