- 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).
- 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 $0.50 % Subsidy 18 19 21 23 25 28 Deductible ($/cwt) $0.60 $0.70 $0.80 $0.90 $1.00 $1.10-$2.00 % Subsidy 31 34 38 43 48 50 - 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) - 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.
Dates Used in Premium Estimation
- 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.
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.
