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Dairy Gross Margin (GM)

(Milk Income overFeed Cost)

New USDA Risk Management Tool for Dairy ProducersOver-view/concepts & illustrations

Includes est. for September 2011 & Scenario Analysis

Gene Gantz, RMA/USDA, gantz@pa.net, 717-497-6397

Graphics by Karen Powell, PA Ag Dept.show E-Mail and Phone

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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.)

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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)

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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

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Dairy Gross Margins Insurance is ….

• Expected gross margin (EGM)• Minus• Actual gross margin (AGM)• = (equals)• Insurance loss payment (of > $1) (LP)

• FormulaEGM – 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

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Dairy LGM - using default feed values and zero deductible purchased:

August 2008 Expected Gross Margin (EGM) vs Actual Gross Margin (AGM)

$6.00

$7.00

$8.00

$9.00

$10.00

$11.00

$12.00

$13.00

$14.00

$15.00

$16.00

Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09

EGM/cwt AGM/cwt

Expected Gross Margin

Coverage

Actual Gross Margin

Cumulative difference between pink and yellow lines times enrolled amount of milk is estimated amount of indemnity (loss payment)

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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

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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?

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Potential PerformanceRetroactive 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)

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Performance Snapshot of Three Enrollment Patterns (with federal subsidy)Using consistent milk enrollment amounts and selected monthly patterns each enrollment period (Indemnity/Premium)

Sales Scenario I Scenario II Scenario III

Periods Enrollment Months Enrollment Months Enrollment MonthsReviewed Deductibles 4,5, & 6; 33% each mo 7,8,9, & 10; 25% each mo 1,2,3,4,5,6,7,8,9,10; 10% ea mo

August 2008 zero 2.53/1.00 1.86/1.00 2.19/1.00through

June 2010$1.50 6.14/1.00 2.79/1.00 5.53/1.00

10 year zero 1.33/1.00 1.40/1.00 1.50/1.00retro active

performance$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

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If you choose less than 10 month enrollments your

safety-net may have holes in it

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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 states2. Available deductibles – from zero to $2 /cwt in $0.10/cwt intervals

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 marginFeed cost comparison of different rations

Corn Equivalents Corn @ Soybean Meal@ Total CostBu. Ton Lbs. Ton $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 0.50 0.014 4.00 0.002 $2.93 $0.68 $3.61

For details contact crop insurance agent (list available @ http://www3.rma.usda.gov/apps/agents/) Rev.12-31-2010

3. The federal premium subsidy:

Soybean Meal Equivalents

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(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

Amount Enrolled in Dairy GM

Gross Margin

Insured Months

Covered Production Each month

Est. Gross Margin

Guarantee @ 0

Deductible (income

over feed costs)

Est, Milk Price

(class 3 futures)

Est.Total Feed Cost

(futures)

Est.. Corn or

Equivlants Price

(futures) @ 1/2

bu./cwt of milk

Est . Soybean Meal or

Equivalents Price

(futures) @ 4 lbs./cwt

of milk

Avg. Milk Futures

Avg. Corn Futures

Avg. Soybean

Meal Futures

Covered Corn Equiv

Covered Soybean

Equiv

cwt/month $/cwt $/cwt($)/cwt

Milk($) ($) ($/cwt) ($/bu) ($/ton) (Tons) (Tons)

Nov-11 1 14.15 18.40 4.25 3.54 0.71 18.40 7.08 354.60 0.014 0.002

Dec-11 1 13.65 17.89 4.24 3.53 0.71 17.89 7.06 356.83 0.014 0.002

Jan-12 1 13.10 17.37 4.27 3.55 0.72 17.37 7.10 358.89 0.014 0.002

Feb-12 1 12.65 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

Apr-12 1 12.51 16.85 4.34 3.62 0.73 16.85 7.23 363.12 0.014 0.002

May-12 1 12.49 16.85 4.36 3.64 0.73 16.85 7.27 364.02 0.014 0.002

Jun-12 1 12.67 17.05 4.38 3.65 0.73 17.05 7.29 365.14 0.014 0.002

Jul-12 1 12.78 17.17 4.39 3.66 0.73 17.17 7.31 366.26 0.014 0.002

Aug-12 1 13.10 17.34 4.24 3.52 0.73 17.34 7.03 363.05 0.014 0.002

Total/Avg. 10 12.97 17.28 4.31 3.59 0.72 17.28 7.17 361.47 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 ismaintained 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/

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)

Calculating the Gross Margins Prices Used to calculate gross margins

Feed Quantities used to calculate

gross margins)

Eligible months

Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-1210 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

LAST MONTH - August 2011 Enrollment Period (Snapshot of Expected Gross Margins per Cwt. of Milk Enrolled)

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Early Estimates for September Enrollment (9/30-10/1/2011) Zero Deductible; 9/14-16 futures prices used to calculate

margins

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/

Covered Milk

Covered Corn Covered SBM

Milk Revenue

$/cwt of

$/cwt of

× Expected Price

× Expected Price

× Expected Price

- Corn Cost

Farm Milk

Covered Milk

#NAME? #NAME? #NAME?- SBM Cost

-

100 cwt 1.4tons 0.2tons×

$18.40/cwt × $7.08/bu×

$354.60/ton

= $1,840 = $354 = $70

100 cwt 1.4tons 0.2tons× $17.89/cwt × $7.06/bu

× $356.83/ton

= $1,789 = $353 = $71

100 cwt 1.4tons 0.2tons×

$17.37/cwt × $7.10/bu×

$358.89/ton

= $1,736 = $355 = $71

100 cwt 1.4tons 0.2tons

× $16.94/cwt × $7.15/bu

× $360.56/ton

= $1,693 = $357 = $72

100 cwt 1.4tons 0.2tons

× $16.92/cwt × $7.19/bu

× $362.22/ton

= $1,691 = $359 = $72

100 cwt 1.4tons 0.2tons

× $16.85/cwt × $7.23/bu

× $363.12/ton

= $1,684 = $361 = $72

100 cwt 1.4tons 0.2tons×

$16.85/cwt × $7.27/bu×

$364.02/ton= $1,684 = $363 = $72

100 cwt 1.4tons 0.2tons×

$17.05/cwt × $7.29/bu×

$365.14/ton

= $1,704 = $364 = $73

100 cwt 1.4tons 0.2tons×

$17.17/cwt × $7.31/bu×

$366.26/ton

= $1,716 = $365 = $73

100 cwt 1.4tons 0.2tons×

$17.34/cwt × $7.03/bu×

$363.05/ton

= $1,733 = $351 = $72

Farm

GMGCove

12,96812.97

1,000 cwt 14 tons 2 tonsTotal

1,000 cwt 14 tons 2 tons100% 12.97

12.78 12.78

1,309 13.1 13.1

1,278

Aug-12

J ul-12

12.49 12.49

J un-12 1,267 12.67 12.67

May-12 1,248

12.6 12.6

1,250 12.51 12.51

1,260

Apr-12

Mar-12

13.1 13.1

Feb-12 1,264 12.65 12.65

J an-12 1,310

14.15 14.15

1,364 13.65 13.65

1,414

Dec-11

Monthly Gross Margin

Nov-11

SBM Qty.

Soybean Meal Equiv(tons)

% covered

Coverage

Month

Production

(cwt)

Corn Equiv

(tons)

Month YearMilk Qty.

Corn Qty.

100 1.4 0.2 100

100 1.4 0.2 100

100 1.4 0.2 100

100 1.4 0.2 100

100 1.4 0.2 100

100 1.4 0.2 100

100 1.4 0.2 100

100 1.4 0.2 100

100 1.4 0.2 100

100 1.4 0.2 100

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Summary of protection and estimated cost

Deductible TotalSubsidiz

edGMG

Net GMG

Prob.Net

Premium% Net Prem.

% GMGNet

Prem/cwtGMG/cwt

Net GMG/cwt

Net Prem/cwt

GMG/cwtNet

GMG/cwt

Level Premium Premium ($) ($) of as % change Change of Farm of Farm of Farmof

Coveredof

Coveredof

Covered($/cwt) ($) ($) Payout of GMG Milk Milk Milk Milk Milk Milk

(%) (%) ($/cwt) ($/cwt) ($/cwt) ($/cwt) ($/cwt) ($/cwt)0 977 801 12,968 12,167 52 6.18 - - 0.80 12.97 12.17 0.80 12.97 12.17

0.1 924 748 12,868 12,120 50 5.82 -6.60 -0.77 0.75 12.87 12.12 0.75 12.87 12.120.2 872 689 12,768 12,079 49 5.40 -13.97 -1.54 0.69 12.77 12.08 0.69 12.77 12.080.3 823 633 12,668 12,034 47 5.00 -20.92 -2.31 0.63 12.67 12.03 0.63 12.67 12.030.4 775 581 12,568 11,987 45 4.63 -27.43 -3.08 0.58 12.57 11.99 0.58 12.57 11.990.5 729 525 12,468 11,943 43 4.21 -34.45 -3.86 0.53 12.47 11.94 0.53 12.47 11.940.6 685 472 12,368 11,895 42 3.82 -41.00 -4.63 0.47 12.37 11.90 0.47 12.37 11.900.7 642 424 12,268 11,844 40 3.46 -47.06 -5.40 0.42 12.27 11.84 0.42 12.27 11.840.8 602 373 12,168 11,795 38 3.07 -53.43 -6.17 0.37 12.17 11.80 0.37 12.17 11.800.9 562 337 12,068 11,731 37 2.80 -57.88 -6.94 0.34 12.07 11.73 0.34 12.07 11.731 524 272 11,968 11,695 36 2.28 -65.95 -7.71 0.27 11.97 11.70 0.27 11.97 11.70

1.1 488 244 11,868 11,624 34 2.06 -69.54 -8.48 0.24 11.87 11.62 0.24 11.87 11.621.2 453 226 11,768 11,541 32 1.93 -71.70 -9.25 0.23 11.77 11.54 0.23 11.77 11.541.3 420 210 11,668 11,458 31 1.80 -73.75 -10.02 0.21 11.67 11.46 0.21 11.67 11.461.4 389 194 11,568 11,373 29 1.68 -75.71 -10.80 0.19 11.57 11.37 0.19 11.57 11.371.5 359 179 11,468 11,288 27 1.57 -77.55 -11.57 0.18 11.47 11.29 0.18 11.47 11.291.6 332 166 11,368 11,202 26 1.46 -79.28 -12.34 0.17 11.37 11.20 0.17 11.37 11.201.7 305 152 11,268 11,115 24 1.36 -80.92 -13.11 0.15 11.27 11.12 0.15 11.27 11.121.8 281 140 11,168 11,028 23 1.26 -82.46 -13.88 0.14 11.17 11.03 0.14 11.17 11.031.9 258 129 11,068 10,939 21 1.17 -83.90 -14.65 0.13 11.07 10.94 0.13 11.07 10.94

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Reasons to Buy - Dairy Gross Margins Insurance (DGM)

1. Establish monthly safety-net - 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.).

2. 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.

3. Reduce feed piece volatility risk - DGM provides protection from increased feed prices when milk prices do not have a corresponding increase.

4. Premium subsidy and time of payment - if enrollment is for two or more months and not billed until end of insurance (enrollment) period.

5. 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.

6. 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.

7. Create improved MILC program – appropriate amounts of milk enrollment in DGM may be used to function similar to MILC payments.

8. 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.

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Expected Gross Margin (ins. guarantee)

MinusActual Gross Margin

=Indemnity

Producer feed InputsTarget milk marketings(All or part of your milk) Actual Gross

Margin is Calculated

Actual BOT PricesDetermined

Expected Gross Margin

(Ins. Guarantee)

Expected BOT Prices Determined

How Dairy GM

Works

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25“It’s a program that can help a producer survive

a disaster and return to profitability!”