Using the Premium Estimator

  1. The first step in estimating the premium costs of a user defined LGM-Dairy contract is to input:
    • Month and Year of the LGM-Dairy contract offering to be analyzed
    • Monthly approved target milk marketings (cwt)
    • Associated purchased corn and soybean meal(SBM) equivalents used in the production of these target marketings
    • Percent of approved target milk marketings to be insured which can vary across months
    • Desired deductible ($GMG/cwt of insured production not insured)

    If you have undertaken an earlier analysis where you saved your inpuut data to a CSV file (and able to be read by Excel) you can skip to Step 2.

    If you have not previously saved data, enter the above information using the Premium Estimator's input form.  Figure 1 is used to show the pull-down menus for year and month of contract offering, deductible level, and the methods by which the feed equivalents can be added to the database.

    Figure 1:  Input Form for Identifying Contract, Deductible and Feed Entry Method

    Insurance Contract Month
    The contract month pull-down menu allows one to either choose the upcoming LGM-Dairy conract offering or to undertake an historical analysis.  The default contract month by default is the upcoming LGM-Dairy contract offering unless you are using a previously stored data file.  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.  An error will be generated when you specify a contract offering month after the next contract month.

    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 (GM) in $0.10 increments.  The deductible represents that portion of GM of insured milk that is not insured.  Starting in December 2010 and as specified by program rules, the higher the deductible rate the greater the premium subsidy.  Table 1 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

    Entering Feed Equivalent Values
    There are four methods for entering your feed equivalent values as shown by the last row of the input form shown in Figure 1:
    • Enter feed equivalents manually
    • Use minimum allowable feeding rates as specificed by the LGM-Dairy insurance rules (Tons/cwt)
    • Use the default feeding rates as outlined in the LGM-Dairy insurance rules (Tons/cwt)
    • Use maximum allowable feeding rates as specified by the LGM-Dairy insurance rules (Tons/cwt)

    The following provides a brief overview of the methods that can be used to enter the feed equivalents for your LGM-Dairy contract.
    • When you choose the Enter Manually method for feed input you will supply for each month 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 is based on the Penn State Dairy Reference Manual and there are two versions We have also developed a version based on data from the National Research Council
    • 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 tons (0.13 bu) and 0.000805 tons (1.61 lbs), respectively.
    • When using the Default feed equivalent entry method you are choosing to use the LGM-Dairy program's predefined default feed equivalents.   The of tons of corn grain and SBM equivalents per cwt of milk are 0.014 (0.5 bu) and 0.002 (4.0 lbs), 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 tons (1.04 bu) and 0.006425 tons (12.85 lbs), respectively.

    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 premium determination.  If you are estimating premiums for an upcoming LGM-Dairy contract offering the dates of the data used in such estimation are 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 2, 2011.

    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 coverage months, deductible and method of feed entry, you can now enter the approved target marketings (i.e., milk production), feed equivalents and the monthly incurance coverage percentages.   Once entered, you have effectively identified your LGM-Dairy contract design.  Figure 3 shows the input form used for entering this dataassuming you are entering the feed equivalents via the manual method:

    Figure 3:  The Portion of Premium Estimator Input Form Used to Enter Production, Feed and % Coverage Data

    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 final column of data input is the desired percentage of monthly gross margin to be insured.  Note that these percentages can vary across months.

    Also note how one provides the percentage values.  For example 10% is represented by 10 not .10 .  If you want 0% coverage in a particular month then you can uncheck the month and that automatically places a 0% value in the associated % Covered cell.  Alternatively, you can simply place a 0 value in the appropriate percentage cell.

    The last two rows of this input form provide a summary of total marketings, covered marketings, total feed equivalents used, total feed equivalents associated with insured milk and the percent of total production insured by this particular contract. In this example the user is ensuring 39.95% of total approved target marketings over the 10 month insurance period (Aug. 2011 - May 2012).

    The columns that are not yellow provide the results of calculations undertaken by the Premium Estimator given what you have entered and prior to the contract premiation determination. For example in the column next to the milk quantities estimated revenue for the insured milk is displayed.  For the Sept. 2011 coverd production the Premium Estimator multiplies the % covered (i.e., 50%) by the September approved target marketings (i.e., 1100 cwt) to obtain the insured 550 cwt.  The Premium Estimator obtains the estimated Sept. 2011 expected Class III price using the average of the Sept. 2011 Class III futures settle prices observed on May 27, May 31 and June 1 (i.e., $19.02).    The expected revenue for August 2011 was estimated to be 550 cwt x $19.02/cwt = $10,460.  The same general procedure was used to calculate the expected corn (i.e.,$2,123) ) and SBM ($570) costs.

    Estimation of the Contract's Gross Margin Guarantee
    With the above data, an estimate of the contract Gross Margin (GM) and Gross Margin Guarantee (GMG) can be obtained where:

    GM = Expected Total Contract Milk Revenue - Expected Total Contract Feed Costs
    GMG = GM - Total Contract Deductible.

    To the right of the data shown in Figure 3 these calculations are done automatically by the Premium Estimator and displayed in the last 3 columns of the input form:

    Figure 4:  Last 3 Columns of Input Form Showing Calculation of Gross Margin Guarantee

    As noted above, the 3 columns of Figure 4 are used to show the monthly gross margin calculations using the results of the expected revenue and feed cost calculations.  If any of the input values change the Premium Estimator will automatically recalculate the monthly gross margin.  In the last row of this column, the total contract GMG is displayed, (i.e., $54,067) which is obtained by summing the monthly values.  The last two columns of Figure 4 display the monthly gross margins and GMG on a per cwt basis.  The $/cwt Farm Milk column divides the GMG by the total allowable target marketings (i.e., 10,825 cwt).  The last column is used to show the per cwt results when only Covered (insured) milk is divided into the total GMG (i.e., 4,325 cwt).  In this example we see that the designed contract generates a GMG of $4.99/cwt for total approved target marketings and $12.50/cwt of insured milk.

    Saving Your Data
    Figure 4 shows the complete input form and resulting GMG calculation.  At this point you can save your input by accessing the Save Input button displayed at the bottom of the input form and shown in Figure 5.  When using this button the milk marketings, corn equivalent, SBM equivalent, deductible, data of contract and percent coverage (by month) are saved in a CSV file.  You may edit this with a spreadsheet program like Microsoft's' EXCEL.  Saving your input avoids one from having to re-enter the same data across different analysis sessions.  You can then skip to Step 3.

    Figure 5:  Action Buttons Located Just Below the General Input Form

    Besides saving your input, in Figure 5 you see the Save GMG Calculations button.  By pressing this action button you save to a named spreadsheet the entire input form and resulting GMG calculations based on this input data.

  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 Calculate Premium button shown in Figure 5 you obtain an estimate of the:
    • Premium of the predefined contract (i.e., with the assumed deductible) within a summary table.
    • Premium costs, net premium costs and GMG's under all allowable deductible levels.  These values are displayed both in the aggregate as well as on a per cwt basis using both cwt measures.

    Figure 6 is used to show the Summary portion of the Results section of the Premium Estimator.  Both total and per cwt results are shown with respect to net (of subsidy) premium, GMG and net GMG are shown where:

      Net GMG = GMG - Original Premium + Premium Subsidy

    Also shown in this Figure is a action button which can be used to save the input and the results of the premium estimation.  These results are saved to an EXCEL file at a location you specify.

    Figure 6:  Summary Results Table

    Figures 7a & 7b shows the Sensitivity Analysis of Premium and GMG values for all allowable deductible levels.  It should be remembered that when viewing these figures that the contract configuration does not change except for deductible level.

    Figure 7a:  Aggregate Deductible Sensitivity Analysis

    For each deductible level, the Total Premium column in Table 7a column 2 is used to show the total contract premium prior to the application of the associated premium subsidy.  The next column is used to show the total cost of the contract net of subsidy (i.e., total Subsidized Premium).  The next two columns show the total GMG and total Net GMG after subtracting the subsidized premium.

    The determination of contract specific premiums is based on the expected (i.e., average) indeminities under this contract using 5,000 random Class III, corn grain and SBM price scenarios.  The Prob. of Payout column shown in Figure 7A is used to display the percent of the 5,000 random price scenarios in which there was an indemnity payout.  To obtain a relative measure of the actual cost of the particular contract, the Net Premium as % of GMG values are shown:

    The last two columns of Figure 7a show the percent change from the $0 deductible level of Net Premiums and GMG.   The row with the yellow highlight is the base run represented in the summary table shown in Figure 6.

    At the top of Figure 7a is an action button that expands Figure 7a to include the a number of per cwt measures of contract cost.  These expanded columns are shown in Figure 7b.

    Figure 7b:  Per CWT Deductible Sensitivity Analysis Results

    For each deductible we show per cwt results for two measure of production: total approved marketings (i.e., Farm Milk) and Covered Milk (i.e., insured). We disply the Net Premium, GMG and Net GMG per both cwt measures.

  4. If you undertake an historical analysis or you would like to undertake an analysis of an open (i.e., still active) LGM-Dairy contract, the Premium Estimator will show the actual performance (i.e., whether an indemnity was paid or not) if the contract is no longer active or an estimate of the performance if the contract is still active.   These additional pages will only be shown in the results section so long as the analysis is not concerned with the next LGM-Dairy contract offering.

    To illustrate the type of information displayed for a completed LGM-Dairy contract. We use the same contract as used for the June 2011 contract offering but applied to June 2008.  For the June 2008 contract the first coverage month was Aug. 2008 and the last month with coverage was May 2009 The first table shown in the Actual Results section is shown in Figure 8.

    Figure 8:  Expected and Actual Prices Obtained Under the June 2008 LGM-Dairy Contract

    In the 1st table in the Actual Gross Margin section both the expected Class III, Corn and SBM prices that existed at sign-up and actual prices of these commodities that were obtained as the contract matured are displayed.  For those actual prices that are known they are displayed in red.  These actual prices are obtained from the USDA, Risk Management Agency.  If actual prices are not available for certain months, the Premium Estimator will use the most current futures settle prices as an estimate of the actual prices.

    In the 2nd table in this section, the performance of an historical LGM-Dairy contract both on a total and per cwt basis under the 21 allowable deductible levels are displayed.  In Figure 9 below, the deductible-specific GMG's, Premium, Subsidized Premium and AGM are displayed.  For both Indemnity and Net (of subsidized premium) Indemnity we show the Total values, per cwt of farm milk values, and per cwt of covered milk values for these deductibles.

    Figure 9:  Actual Performance of the June 2008 LGM-Dairy Contract