Evaluating the Performance of an Active LGM-Dairy Contract

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 File Button
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 1^st element is the approved target marketings for that particular month (cwt), the 2^nd and 3^rd 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 1^stauxillary 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 9^th (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 9^th. 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.

	Expected Price			Actual Prices			% Change
Month	Class III	Corn	SBM	Class III	Corn	SBM	Class III %	Corn %	SBM %
Jan 2011	13.85	5.34	331.37	13.49	6.02	371.73	-2.6	12.7	12.2
Feb 2011	13.91	5.38	332.54	17.07	6.40	359.82	22.7	19.0	8.2
Mar 2011	14.00	5.43	330.70	19.45	6.77	347.90	38.9	24.7	5.2
Apr 2011	14.00	5.47	333.14	16.80	6.82	347.20	20.0	24.7	4.2
May 2011	14.12	5.50	332.57	16.53	6.86	346.50	17.1	24.7	4.2
Jun 2011	14.33	5.52	332.32	19.00	7.36	359.70	32.6	33.3	8.2
Jul 2011	15.02	5.54	332.07	19.77	7.86	372.90	31.6	41.9	12.3
Aug 2011	15.21	5.38	324.43	18.81	7.70	366.60	23.7	43.1	13.0
Sep 2011	15.36	5.22	314.63	18.44	7.54	365.90	20.1	44.4	16.3
Oct 2011	15.45	5.15	298.13	17.83	7.41	362.60	15.4	43.9	21.6

Figure 5: Percent Change in Expected versus Actual Prices

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 contract
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 contract