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September 03, 2010

Livestock Gross Margin for Swine (LGM)

Introduction

LGM-Swine provides protection only for the gross margin between the value of insured hogs and the cost of corn and soybean meal. It covers a decline in hog prices and/or an increase in feed costs. Swine producers in all Iowa counties feeding Iowa hogs are eligible for LGM (producers must have an ownership share in hogs being produced). Producers can choose coverage levels of 80%, 85%, 90%, 95%, or 100%.

VALUES ARE DETERMINED ONLY BY FUTURES PRICES

How it Works

Farrow to Finish

Gross Margin Per Month =
2.6 x 0.74 x Lean Hog Price_t - 12.95 bu. x Corn Price_t-3 - (184.89 lb. / 2000 lb.) x Soy Meal Price_t-3 x Number of Hogs

Finishing

Gross Margin Per Month =
2.6 x 0.74 x Lean Hog Price_t - 10.41 bu. x Corn Price_t-2 - (149.46 lb. / 2000 lb.) x Soy Meal Price_t-2 x Number of Hogs

Segregated Early Weaners (SEW)

Gross Margin Per Month =
2.6 x 0.74 x Lean Hog Price_t - 11.03 bu. x Corn Price_t-2 - (167.18 lb. / 2000 lb.) x Soy Meal Price_t-2 x Number of Hogs
_{t = base time, t-2 = base - 2 months, t-3 = base - 3 months}

Loss Payments

Calculate the Actual Gross Margin using the last three trading days prior to each contract’s expiration date.
Subtract the Total Actual Gross Margin from the Gross Margin Guarantee to obtain the loss payment.
The price at which hogs are sold does not affect the loss payment.
Loss payments will be prorated if actual number of hogs marketed falls below 75% of target marketings.

LGM-Swine Coverage Period and Restrictions

12 insurance periods per calendar year.
Price risk protection lasts for six months (ex: Jan. 31 sales closing date covers Feb. [no coverage in Feb.], - July).
Target marketings cannot be insured in the first month of the period.
Price guarantees are based on futures prices and are set the last business day of each month.
Sales period begins after prices/rates are set by RMA until 9:00 a.m. (Central Standard Time) the next business day.
Covers up to 15,000 hogs during any six month insurance period (up to 12 periods each year) and up to 30,000 per crop year (July 1 – June 30).

NOTE: The 2005 Livestock Price Reinsurance Agreement allows for Private Reinsured Companies to have limited yearly capacity available on a first come, first served basis.

Advantages of LGM over Traditional Options

Convenience
You can sign up for LGM for swine twelve times per year and insure all of the hogs 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 (hog price and feed cost) all in one package.