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Dairy Gross Margin GM Milk Income over Feed Cost New USDA Risk Management Tool for Dairy Producers Over-view

2. What is a GROSS MARGIN? Expected Gross Margin Illustration Aug. 08 GM Purchase for July 09. Milk Income Over Feed Cost - "----------------------------------------------------Milk prices = $17.81 times 1 Cwt. = $17.81Feed prices Corn $ 6.31 bu. X .014T.(1/2 Bu.) = $ 3.16 Soymea

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Dairy Gross Margin GM Milk Income over Feed Cost New USDA Risk Management Tool for Dairy Producers Over-view

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    1. 1 Dairy Gross Margin (GM) (Milk Income over Feed Cost) New USDA Risk Management Tool for Dairy Producers Over-view/concepts & illustrations Includes est. for 9/10/10 enrollment period (8/05/10 edition) Gene Gantz, RMA/USDA Graphics by Karen Powell, PA Dept. of Ag. gantz@pa.net, 717-497-6397

    2. 2 What is a GROSS MARGIN? Expected Gross Margin Illustration Aug. 08 GM Purchase for July 09 “Milk Income Over Feed Cost - ” ---------------------------------------------------- Milk prices = $17.81 times 1 Cwt. = $17.81 Feed prices Corn $ 6.31 bu. X .014T.(1/2 Bu.) = $ 3.16 Soymeal $370.63/T X .002T.(4 lbs)= $ .74 Total Feed Cost----------------- $ 3.90 Expected Gross Margin(milk – feed) $ 13.91 (All feed is converted to Shelled corn (energy) & Soymeal (protein) equivalents; USDA default feed amounts used in above example)

    3. 3 Actual Gross Margin – July 09 Aug. 08 GM Purchase for July 09 “Milk Income Over Feed Cost - ” ---------------------------------------------------- Milk prices = $ 9.94 times 1 Cwt. = $ 9.94 Feed prices Corn $ 3.49 bu. X .014T.(1/2 Bu.) = $ 1.75 Soymeal $367.70/T. X .002T.(4 lbs)= $.74 Total Feed Cost---------------- $ 2.49 Actual Gross Margin (milk – feed) -- $ 7.45 (All feed is converted to Shelled corn (energy) & Soymeal (protein) equivalents; USDA default feed amounts used in above example)

    4. 4 Insurance Loss Payment (Indemnity) Aug. 08 GM Purchase for July 09 “Milk Income Over Feed Cost - ” ---------------------------------------------------- Expected Gross Margin ---- $ 13.91 Actual Gross Margin -------- $ 7.45 Ins. Payment (Indemnity) $ 6.46 (per Cwt. Enrolled in Dairy GM for the Month) @ 0 deductible

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    6. 6 Dairy Gross Margins New risk management tool for dairy producers Guarantees a minimum income over feed cost to producers A federally reinsured, dairy insurance program through the USDA crop insurance program Effectively establishes a floor on milk prices and a ceiling on grain prices, based on board of trade price Provides insurance guarantee safety-net met from marketplace (higher than expected milk prices/lower feed costs), or insurance loss payment, or combination of any or all components Provides protection against unexpected declines in gross margins (market value of milk minus feed costs) on target quantity of marketed milk, WITHOUT Forfeiting Unexpected Gains. Enrollment periods occur the last business Friday of each month and end at 9 P.M. the next day

    7. 7 Prices Used - GM “Milk Income Over Feed Cost” Protection ---------------------------------------------------- Milk prices = Class 3, Chicago Merc. Exc. Feed prices = Chicago Board of Trade (All feed is converted to Shelled corn (energy) & Soymeal (protein) equivalents) or use USDA default feed ration of ˝ bu. of corn and 4 lbs of soymeal per cwt of milk.

    8. 8 Dairy Gross Margin (GM) is … “Milk Income Over Feed Cost” Using either USDA milk to feed ratios or Your selected Quantities of Milk & Feed for a your selected time period. HOW It Works: 1. Expected GM is determined for a future time period (up to 10 mo.) Expected GM is compared to actual GM for selected time period 3. Claim is paid when actual is less than expected GM

    9. 9 Time Periods …. Twelve, twelve month insurance periods each calendar year Any or all expected milk of the last 10 months of each insurance period can be insured Maximum milk enrollment – 240,000 Cwts. annually

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    11. 11 Expected Gross Margin Illustration Aug. 08 GM Purchase for July 09 “Milk Income Over Feed Cost - ” ---------------------------------------------------- Milk prices = $17.81 times 1 Cwt. = $17.81 Feed prices Corn $ 6.31 bu. X .014T.(1/2 Bu.) = $ 3.16 Soymeal $370.63/T X .002T.(4 lbs)= $ .74 Total Feed Cost----------------- $ 3.90 Expected Gross Margin(milk – feed) $ 13.91 (All feed is converted to Shelled corn (energy) & Soymeal (protein) equivalents; USDA default feed amounts used in above example)

    12. 12 Actual Gross Margin – July 09 Aug. 08 GM Purchase for July 09 “Milk Income Over Feed Cost - ” ---------------------------------------------------- Milk prices = $ 9.94 times 1 Cwt. = $ 9.94 Feed prices Corn $ 3.49 bu. X .014T.(1/2 Bu.) = $ 1.75 Soymeal $367.70/T. X .002T.(4 lbs)= $.74 Total Feed Cost---------------- $ 2.49 Actual Gross Margin (milk – feed) -- $ 7.45 (All feed is converted to Shelled corn (energy) & Soymeal (protein) equivalents; USDA default feed amounts used in above example)

    13. 13 Insurance Loss Payment (Indemnity) Aug. 08 GM Purchase for July 09 “Milk Income Over Feed Cost - ” ---------------------------------------------------- Expected Gross Margin ---- $ 13.91 Actual Gross Margin -------- $ 7.45 Ins. Payment (Indemnity) $ 6.46 (per Cwt. Enrolled in Dairy GM for the Month) @ 0 deductible

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    16. 16 Increased ICOFC $3 to $6/cwt. of enrolled milk per month Jan – July 09 Monthly enrollments – last business Friday

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    31. 31 Benefit Cost Ratio Enrollments Aug. 08 – June 09 (ending 5/10) (Actual performance if 200 cwts. enrolled each mo., for 11 enrollment periods) Loss payment occurred each enrollment period (but not every month in each period) Estimated Total Loss Payments $51,492 Estimated Total Premium Payments $18,625 Avg. Premium per Cwt of Milk Enrolled $0.77 Benefit Cost Ratio $2.76/$1

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    37. 37 Enrollment Issues - Dairy LGM 1. How much milk can a producer afford to enroll in dairy LGM (premium cost limitation)? 2. What month(s) are the best time to enroll milk? 3. Are there any performance tested patterns of insuring different months?

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    40. 40 Snapshot of Three Enrollment Patterns (Enrollment period covered Feb. 2000 through June 2009 (ending 5/10))

    41. 41 Deductibles courtesy of Alan Zepp CDE

    42. 42 10% /Month- 10 Months Courtesy Alan Zepp CDE

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    44. 44 A Dairy Gross Margin is …. “Milk Income Over Feed Cost” Using Your Quantities of Milk & Feed Times Board of Trade Prices for your selected time period (month or months).

    45. 45 Dairy Gross Margins Insurance is …. Expected gross margin (EGM) Minus Actual gross margin (AGM) = (equals) Insurance loss payment (of > $1) (LP) Formula EGM – AGM = Loss Payment …. For the producer’s selected monthly time period (month or group of months)

    46. 46 Managing Downside Risk Increases Long-Term Profits!

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    48. 48 Sources For More Information Contact a crop insurance agent Available Websites: Understanding Milk Marketing http://future.aae.wisc.edu/lgm_premium http://www.cropins.aers.psu.edu/ www.rma.usda.gov http://farm-risk-plans.usda.gov www.agriculture.state.pa.us http://www3.rma.usda.gov/apps/agents/ http://farm-risk-plans.usda.gov/pdf/risk_management_checklist.pdf

    49. 49 “It’s a program that can help a producer survive a disaster and return to profitability!”

    50. 50 END Thanks for your interest in the Dairy Gross Margins Ins. Program.

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