Evaluating the Performance of an Active
Once you purchase an LGM-Dairy contract, the LGM-Analyzer system can be
used to provide an on-going assessment of whether the IOFC floor
established via the LGM-Dairy contract will be exceeded due to better than anticipated market
conditions or whether an indemnity is likely. Below are
the steps required to undertake an on-going analysis of an active
- The first step required in the monitoring of an on-going
contract is to input the contract as specified at
sign-up. The easiest method to do this is to obtain your
contract specification from the CSV file that you created
when you purchased the contract. In Figure 1, we show the Upload a File
button that can be used to access a previously created CSV file that
was created by the analsyzer system. By clicking on this
button you have access to the usual File Manager from which you can
select your input file.
Figure 1: Using the Upload a
On the left side of Figure 2 shown below, we present an example of the CSV that is created by
the Premium Estimator and that can later be used for input. The first row of this file contains
the deductible level (e.g., $1/cwt) and the contract date (June 2011). The
remaining 10 rows contain information necessary to define the LGM-Dairy
contract. Each row pertains to 1 of the 10 months encompassed by
the LGM-Dairy contract of concern. For each row, the
1st element is the approved target marketings for that particular
month (cwt), the 2nd and 3rd elements contain the corn and
SBM equivalents (Tons) necessary to achieve the approved targeting
markets. The last column of data pertains to the % of monthly
approved target marketings to be covered by the LGM-Dairy contract.
Figure 2: CSV File Created by
Premium Estimator Using the Upload a File Button
- For our example, lets assume we purchased a Nov. 2010 LGM contract with the farm
and contract design specified in Figure 3. Per program rules, the first potential month of
coverage is January 2011. The contract is for 10 months ending on Oct. 2012 with varying amounts
of insurance coverage over these months. Over the 10 month period, 45.72% of the gross margins associated
with the approved target marketings were insured. A $1.00 deductible was chosen.
Default feed coefficients were used to determine feed equivalents.
Figure 3: Input Data of a Nov. 2010 Active LGM-Dairy Insurance Contract
Given that the above LGM-Dairy contract is an active contract the Premium
Estimator can determine those months for which Actual Class III, Corn and SBM Prices are known.
These Actual Prices are obtained from the the USDA, Risk Management Agency.
The software will also recognize when Actual prices are not
available for certain months. For those months when Actual Prices are not known, the
Premium Estimator will use the current futures settle prices as an Actual Price
estimate. Given the
above contract, Figure 4 shows the 1stauxillary table associated with the actual contract performance
evaluation of an active LGM-Dairy contract.
Figure 4: Comparison of Actual versus Expected Prices
In Figure 4
the expected Class III, Corn and SBM prices that existed at sign-up are displayed where these
expected prices were obtained on the contract purchase day at the end of November, 2010. From Figure 4,
as of June 9th (when this help file was written)
,Actual Prices existed for the months of Jan - May 2011. These values
are shown with a red font. The software provides estimates of the
June - Oct. 2011 Actual Prices via the settle prices that existed on June 9th.
The expected prices for the unknown Actual Prices are shown using a black font color.
Given the timing of the purchase of the Nov. 2011 LGM-Dairy contract, there were relatively large increases in both feed
costs and Class III milk prices. Table 1 shows the percentage difference between Expected Prices
obtained at sign-up
vs. Actual Prices obtained over the Jan-May 2011 period as well as the difference between Expected Prices
and Estimated Actual Prices for the months of Jun-Oct 2011.
Figure 5: Percent Change in Expected versus Actual Prices
||Class III %||Corn %||SBM %
|Jan 2011 ||13.85||5.34
|Feb 2011 ||13.91||5.38
|Mar 2011 ||14.00||5.43
|Apr 2011 ||14.00||5.47
|May 2011 ||14.12||5.50
|Jun 2011 ||14.33||5.52
|Jul 2011 ||15.02||5.54
|Aug 2011 ||15.21||5.38
|Sep 2011 ||15.36||5.22
|Oct 2011 ||15.45||5.15
After obtaining the observed and estimated Actual Prices the software has sufficient information to provide an
estimate of the actual gross margin (AGM). Given the known GMG, the estimated AGM can be used to provide an
evaluation of possible indemnities. In Figure 6, given the data shown in Figures 3 and 4, the
estimated indemnities are estimated both on a total and
per cwt basis for each of the 21 allowable deductible levels. For both
Indemnity and Net (of subsidized premium)
Indemnity we show the Total, per cwt of farm milk, and per cwt of covered milk indemnity values
for these deductibles.
Figure 5: Estimate of Contract Performance of the Nov. 2010 LGM-Dairy
In this example, the estimated AGM was determined to be $244,320. Note that the AGM does not change
with the deductible level given that AGM = Actual Milk Revenue - Actual Feed Costs. In spite of the dramatic
increases in feed costs, the price of Class III milk increased more significantly resulting in $0 indemnity over the
all deductible levels.
If the same contract as specified above was
undertakin in Nov. 2009, Figure 6 shows the actual contract performance as ALL Actual Prices
were known at the time of this analysis. From this figure we see that for relatively low deductible
levels there are positive indemnities. For deductibles up to $0.40/cwt, the
indemnity was found to be greater than the subsidized premium.
Figure 6: Estimate of Actual Contract Performance of the Nov. 2009 LGM-Dairy