Livestock Gross Margin Insurance (LGM) For Swine Producers
In the last Doctor’s Corner, we discussed a risk management tool known as Livestock Risk Protection (LRP) Insurance. For this edition of the Doctor’s Corner, we would like to discuss another risk management tool option that is available to pork producers from the Risk Management Agency (RMA) of the USDA. This tool is the Livestock Gross Margin Insurance (LGM).
This federally subsidized LGM for Swine Program is designed to help insure pork producers against declining gross margins from declining market prices and/or increasing feed prices. Unlike the LRP-Swine Program which only looks at market pricing for coverage, the LGM Swine Program looks at the CME lean hog market as well as the CME corn and SBM markets to determine expected gross margins in which the producer can then purchase insurance to have a gross margin guarantee.
Like the LRP-Swine Program, pork producers must submit a one-time application to the RMA to be able to use the LGM for Swine Program. The application process establishes producer eligibility for the LGM or LRP policy. The application process is completed with a livestock insurance agent. A list of approved participating insurance agents is available at all USDA service centers and on the RMA website at the Agent Locator page. Many of these agents are also licensed to sell crop insurance. FVC/PCM has been using the Borchardt Agency for information on this program.
Once the producer’s application has been accepted by the RMA, the producers can then purchase specific coverage endorsements (SCE) for their market hogs through the LRP or Gross Margin Guarantee endorsements through the LGM for Swine Program. Producers must be aware that they can only have one of the above Programs’ endorsements active at a time. Multiple endorsements of the same program can be active at the same time but endorsements from different programs cannot be active at the same time. As an example, Producer A with an active LRP SCE that is active until October 15, 2021 cannot sign a LGM endorsement until the October LGM endorsement is offered on October 29, 2021.
Key Operational Points for signing a LGM for Swine Endorsement:
Target Marketings: Your target marketings are a determination you make about the maximum number of slaughter-ready swine that you will market during the insurance period. A producer may insure an unlimited number of head in the current crop year. The producer must be able to deliver at least 75% of the number of head they sign up for the given target marketing month. A producer cannot sign up 5,000 head for a target month and produce only 2,500 in that month. (50%)
Type of Operation: The LGM for Swine Program has three options for producers in which to match their given operation type. The operation choices in LGM are: Farrow to Finish, SEW pig finishing (i.e., Nursery-Finishing or Wean-to-Market), or Finishing
Insurance Purchase Window: LGM-Swine is offered once a month on the last business Friday of the month (or second to last business Friday if last business Friday is a holiday) after trading hours are completed. The RMA will publish the expected gross margins and producer premiums for each of the marketing months in that insurance period. The producer has until 8:00 pm on the next day (Saturday) to sign an LGM endorsement.
Insurance Period: Each LGM Endorsement is a 6-month period with marketings allowed in the last 5 months of the period. As an example, Producer A purchases a LGM endorsement for March which then has an insurance period of April to September. By the rules of LGM, hogs can be marketed in May, June, July, August, and September.
Coverage Level: A LGM endorsement has deductibles from $0.00 to $20.00 in $2.00 increments.
Expected Gross Margin Value: This is the gross margin that can be insured by the producer. Expected gross margins are posted on the RMA website or obtained from your agent as described in the above Insurance Purchase Window description. If the actual gross margin calculated at the time of market is less than the expected gross margin (minus the deductible) on the LGM endorsement, the producer is paid an indemnity.
Actual Gross Margin Value: This is the actual gross margin based on the market value of the swine minus feed costs using CME Actual Prices. The price you receive at the local market is not used in these calculations.
Cost of Insurance: The quote of insurance premium from the RMA. The endorsement will show total premium and the subsidized premium to the producer for each marketing month in the insurance period. LGM premiums depend on your marketing plan, coverage you choose, deductible level, and futures and price volatility. Insurance premiums are due at the end of the given insurance period. If Producer A buys a March LGM endorsement, the premium will come due on September 30th.
Subsidized Cost of Insurance: Currently the RMA is subsidizing the cost of insurance for producers on the LGM from 7.5% to 50%.
Assumptions: To calculate expected and actual gross margins in the LGM Swine Program, the RMA uses several production assumptions. These assumptions were derived from numbers from Iowa State University. These assumptions are as follows:
- Live Sale Weight = 260 lbs. or 2.6 cwt.
- Carcass Yield = 74%
- Corn Usage:
- Farrow-To-Finish = 12 bushels
- SEW Pig Finishing = 9.05 bushels
- Finishing = 9.0 bushels
- SBM Usage:
- Farrow-To-Finish = 138.5 lbs. or 0.06925 tons
- SEW Pig Finishing = 91 lbs. or 0.04550 tons
- Finishing = 82 lbs. or 0.04100 tons
Example Endorsement:
- Click on the imbedded pdf to see an example of a March 2021 LGM Endorsement offer from the RMA.
- The example is for one head to be sold in August.
Calculations:
- CME Contract Months Used for LGM Insurance Months:
- Equations:
- Expected Gross Margin: The equations to determine this margin is quite involved and I would refer the reader to the below link to review the equation in full if desired.
- Actual Gross Margins: The equations to determine this margin is quite involved and I would refer the reader to the below link to review the equation in full if desired.
- Actual Gross Margin per Month: This value is the actual gross margin per swine multiplied by the target marketings for that month.
- Actual Total Gross Margin: This value is the sum of all the months’ actual gross margins for the entire LGM endorsement.
In Summary:
The Livestock Gross Margin Insurance Plan for Swine (LGM-Swine) provides protection against the loss of gross margin (market value of livestock minus feed costs) on swine. LGM-Swine uses futures prices to determine the expected gross margin and the actual gross margin.
The LGM-Swine program can be used in conjunction with other risk management tools to help a producer weather down turns in the hog market and/or increases in feed costs.
The current level of subsidies to the cost of insurance by the RMA makes the program more affordable for pork producers.
If interested in more information, FVC/PCM will be conducting an informational meeting with the Borchardt Agency on the LGM-Swine program in June. Please contact me or Mike Wubbena with any additional questions.
Brian Roggow