Using the Least-Cost Estimator

  1. The first step in using the Least-Cost Estimator is to identify:
    • Month and Year of the LGM-Dairy contract offering to be analyzed
    • Approved target milk marketings (cwt) for each month
    • Purchased corn and soybean meal(SBM) equivalents (tons) used in the production of the above target marketings
    • Desired deductible ($/cwt)

    If you have used the program before and saved the above data from a previous analysis as a CSV file (and able to be read by Excel)you can skip to Step 2.  Otherwise, enter the above information on the program's input form.  The following shows the pull-down menus for year and month of contract offering, deductible level, the options by which the feed equivalents can be added to the database and the target Net Income Over Feed Cost (NIOFC).

    Figure 1:  Input Form for Identifying Contract, Deductible, Feed Entry Method and Target Total Farm Milk Net Income Over Feed Cost ($/cwt)

    Insurance Contract Month
    The pull-down menu allows you to either choose the upcoming LGM-Dairy conract offering or to undertake an historical analysis.  Data is available starting with Feb. 2000 for undertaking such analyses.  Remember that according to insurance rules the earliest coverage can begin is for the 2nd month after the LGM-Dairy contract is purchased (i.e., the Insurance Contract Month) and can continue for up to a total 10 months.  As an example, if you purchase an LGM-Dairy contract at the end of October 2011, the insurance period runs from December 2011 through September 2012.  The listing of the months of data to input are automatically adjusted for the month in which the contract was purchased.

    Deductible Level
    The deductible level is specified per hundred weight of covered milk via the pull-down menu shown above.  The deductible range is from $0/cwt to $2.00/cwt of Gross Margin in $0.10 increments.  Again as specified by program rules, the higher the deductible the greater the premium subsidy.  The following table shows the relationship between deductible level premium subsidy:

    Table 1.  Deductible and Premium Subsidy
    Deductible ($/cwt) $0$0.10$0.20$0.30$0.40$0.50
    % Subsidy181921 232528
    Deductible ($/cwt) $0.60$0.70$0.80 $0.90$1.00$1.10-$2.00
    % Subsidy313438 434850

    Feed Values
    There are four methods for entering your feed equivalent values as shown in the above Figure:
    • Enter manually
    • Use minimum allowable feed
    • Use default values
    • Use maximum allowable feed

    The following provides a brief overview of the methods that can be used to enter the feed equivalents.
    • When you choose the Enter Manually method for feed input you will supply, for each month covered by an LGM-Dairy contract, an estimate of the amount of feed equivalents required to produce the approved target marketings.  We have developed a number of software systems that can be used to convert dairy feed ingredients to corn and SBM equivalents, one based on the Penn State Dairy Reference Manual (web version, spreadsheet) and a 2nd based on data from the National Research Council
    • By choosing the Lowest Allowed method for entering feed equivalents the Premium Estimator will automatically calculate the minimum feed equivalents allowable under LGM-Dairy for the approved target marketings you specify.   The minimum amounts of corn and SBM equivalents per cwt of milk are 0.00364 and 0.000805, respectively.
    • When using the Default feed equivalent entry method you are choosing to use the LGM-Dairy program defined default feed equivalents.   The tons of corn grain and SBM equivalents per cwt of milk are 0.014 and 0.002, respectively.
    • By choosing the Highest Allowed method for entering feed equivalents the Premium Estimator will automatically calculate the maximum feed equivalents allowable under LGM-Dairy for the approved target marketings you specify.   The maximum amounts of corn and SBM equivalents per cwt of milk are 0.02912 and 0.006425, respectively.

    Target Net Income Over Feed Costs (NIOFC)
    In contrast to the Premium Estimator and Options Cost Estimator, when using the Least-Cost Optimizer, the user does not specify the LGM-Dairy contract.  Instead the user supplies the allowable target marketings, feed equivalents and deduductible.  The LGM-Dairy Optimizer identifies the optimal contract design defined as that contract that returns a target net (of premium) IOFC applied to all allowable target marketings at least cost.  Note that under most conditions, less than 100% of the allowable target marketings need to be insured to generate the target/cwt results.

    In the Target NIOFC input cell, specify the target per cwt of total alloable target marketings (i.e., total farm milk)

    Dates Used in Premium Estimation
    The year and month chosen determines the type of data used in the estimation of the desired LGM-Dairy contract.  For dates other then the current month's LGM-Dairy offering a database of historical data is used for premium determination.  If you are estimating contract premiums for the upcoming LGM-Dairy contract offering, then the Premium Estimator will automatically use the most recent 3 days of futures and options data for in premium determination.  If you are estimating premiums for an upcoming offering the following is displayed below the window where you defing your feed input method. In this example we are estimating the premium costs for coverage under the June 2011 contract offering. This analysis was undertaken on June 2nd.

    Figure 2:  Dates of Data Used When Estimating June 2011 Contract Offering Premiums on June 2nd

    Entering Milk Production and Feed Equivalent Data
    With the identification of the potential coverage months, deductible, method of feed entry and target NIOFC, the user can now enter the approved target marketings (i.e., milk production) and estimated feed equivalents.  Figure 3 shows the input form assuming you are entering the feed equivalents manually:

    Figure 3:  Least Cost Optimizaer Input Form Used to Enter Allowable Target Marketings and Feed Equivalents

    The table cells in yellow require the user to input the associated data values.  In this example we are assuming that the manual method is used to enter the feed equivalent information.  The first column identifies the monthly approved target marketings.  The next two columns of input are the estimated total amount of corn and SBM equivlents required to produce the approved target marketings.  The last row of this input form is used to provide a summary of total marketings and total feed equivalents used.

  2. If you already have the saved data from a previous run, simply click the Upload button located above the general input form.  You use the typical file manager to browse to the location where the desired CSV input file is located.

  3. Once you click on the Optimize Coverages for Least Cost Premium shown in the bottom of Figure 3, you obtain:
    • The optimal (li.e., lowest net premium cost) contract design
    • The associated monthly gross margins and total GMG both on a total and a $/cwt basis.

    Figure 4 shows the optimal (least cost) contract design that minimizes the total cost of generating $6.50/cwt NIOFC for total farm marketings. In the example shown in Figure 4, only 73.4% of total allowable marketings are required to be insured to generate the above target NIOFC. 100% of the target marketings for Aug 2011 - Jan 2012 and May 2012 are insured.

    Figure 4:  Optimial (Least Cost) Contract Design


    Once you have identified the optimal (least cost) LGM-Dairy contract, you can then use the Premium Estimator to estimate the contracts premiums and undertake a sensitivity analysis under alternative deductible levels you can select the Calculate LGM Premium button shown at the bottom of Figure 4.  To obtain an overview of the Premium Estimator refer to the associated Premium Estimator help system.

  4. Figure 5 is used to show the Summary portion of the Results section of the program.  Both total and per cwt results are shown with respect to net (of subsidy) premium, GMG and net (of net premium)GMG.  Note that with a premium of $0.26 per cwt of farm milk the $6.76/cwt GMG shown in Figure 4 returns the target NIOFC of $6.50

    Figure 5:  Summary of Results For Premium Determination of the Least Cost Contract Configuration