Livestock Gross Margin for Cattle (LGM)
Introduction
The LGM policy provides protection against the loss of gross margin (market value of livestock minus feeder cattle and feed costs) on feeder (yearling and calf) cattle. LGM covers the difference between the gross margin guarantee and the actual gross margin at the end of the 11-month insurance period. The LGM insurance policy uses adjusted futures prices to determine the expected gross margin and the actual gross margin. LGM does not insure against death loss or any other loss or damage to the producer’s cattle.
Your premium is calculated by a premium calculator program that determines the per head of cattle premium based on target marketings, expected gross margins for each period, and deductibles. You may insure any amount of cattle that you own up to a limit of 5,000 head for any 11-month insurance period and a limit of 10,000 head per crop year. Ownership of insured cattle must be certified by you, the producer, and may be subject to inspection and verification by the company.
Cattle sold for commercial or private slaughter primarily intended for human consumption and fed in Colorado, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Montana, Nebraska, Nevada, North Dakota, Ohio, Oklahoma, South Dakota, Texas, Utah, West Virginia, Wisconsin and Wyoming are eligible for coverage under the LGM for Cattle Insurance Policy.
How It Works
Expected Prices are Determined
Expected corn prices and feeder cattle prices for months in an insurance period are determined using a three-day average settlement price on the CBOT corn futures contract and the CME feeder cattle futures contract respectively.
Producer Inputs Target Marketings The Producer’s Approved Target Marketings are the maximum number of slaughter ready cattle that the producer will market (sell) during the insurance period. Approved Target Marketings are certified by the producer and are subject to inspection by the insurance company.
Producer Selects Coverage Levels The producer can select deductibles from $0 to $150 per head of cattle, in $10 per head increments.
Gross Margin Guarantee is Determined
The gross margin guarantee for each coverage period is calculated by subtracting the per head deductible time total number of cattle to be marketed from the expected total gross margin for the applicable insurance period.
Calf Finishing Operation:
Gross Margin Per Month =
{(CME Live Cattle Pricet + Statewide Basis) X 11.5} = Live Cattle Value
{(CME Feeder Cattle Pricet-8 + Statewide Basis) X 5.5} = Calf Expense
{(CBOT Corn Pricet-4 + Statewide Basis) X 54.5} = Feed Expense
Live Cattle Value – Calf Expense – Feed Expense = Gross Margin
Yearling Finishing Operation:
Gross Margin Per Month =
{(CME Live Cattle Pricet + Statewide Basis) X 12.5} = Live Cattle Value
{(CME Feeder Cattle Pricet-5 + Statewide Basis) X 7.5} = Calf Expense
{(CBOT Corn Pricet-2 + Statewide Basis) X 57.5} = Feed Expense
Live Cattle Value – Calf Expense – Feed Expense = Gross Margin
Actual Prices are Determined
Actual prices are determined on the last 3 trading days before expiration date of the applicable futures contract. Months without futures contracts use the average of the actual prices of surrounding months.
Actual Gross Margin is Calculated
Actual gross margins are calculated for each month and added together to determine Actual Gross Margin for the insured period.
Indemnity = Gross Margin Guarantee – Actual Gross Margin
Indemnities to be paid will equal the difference between the gross margin guarantee and the actual total gross margin for the insurance period.
Advantages of LGM over Traditional Options
Convenience
You can sign up for LGM for cattle twelve times per year and insure all of the cattle you expect to market over a rolling 11-month insurance period. You do not have to decide on the mix of options to purchase, the strike price of the options, or the date of entry.
Customization
The LGM policy can be tailored to any size farm. Options cover fixed amounts of commodities and those amounts may be too large to be used in the risk management portfolio of some farms.
Total Package Protection
LGM protects margin components (cattle price and feed cost) all in one package.