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    ECON 337: Agricultural Marketing

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    ehsanjaved
    This document provides an overview of an agricultural marketing class at Iowa State University. It discusses various livestock price risk management tools that will be covered in the class, including futures and options, livestock revenue insurance, livestock revenue protection, and livestock gross margin insurance. Livestock revenue protection and livestock gross margin insurance are explained in further detail. The document notes some of the benefits and limitations of these risk management strategies.

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    ECON 337: Agricultural Marketing

    Uploaded by

    ehsanjaved
    49 views20 pages
    This document provides an overview of an agricultural marketing class at Iowa State University. It discusses various livestock price risk management tools that will be covered in the class, including futures and options, livestock revenue insurance, livestock revenue protection, and livestock gross margin insurance. Livestock revenue protection and livestock gross margin insurance are explained in further detail. The document notes some of the benefits and limitations of these risk management strategies.

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    Lecture 130411

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    This document provides an overview of an agricultural marketing class at Iowa State University. It discusses various livestock price risk management tools that will be covered in the class, including futures and options, livestock revenue insurance, livestock revenue protection, and livestock gross margin insurance. Livestock revenue protection and livestock gross margin insurance are explained in further detail. The document notes some of the benefits and limitations of these risk management strategies.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    49 views20 pages

    ECON 337: Agricultural Marketing

    Uploaded by

    ehsanjaved
    This document provides an overview of an agricultural marketing class at Iowa State University. It discusses various livestock price risk management tools that will be covered in the class, including futures and options, livestock revenue insurance, livestock revenue protection, and livestock gross margin insurance. Livestock revenue protection and livestock gross margin insurance are explained in further detail. The document notes some of the benefits and limitations of these risk management strategies.

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    ECON 337:

    Agricultural Marketing

    Lee Schulz
    Assistant Professor
    [email protected]
    515-294-3356
    Econ 337, Spring 2013

    Chad Hart
    Associate Professor
    [email protected]
    515-294-9911

    Livestock Price Risk Tools


    Livestock Futures and Options
    Livestock Revenue Insurance
    Livestock Revenue Protection (LRP)
    Livestock Gross Margin (LGM)
    http://www.rma.usda.gov/livestock/
    Factsheets
    Premium calculator
    http://www.extension.iastate.edu/agdm/ldcostsreturns.html

    Econ 337, Spring 2013

    Livestock Risk Protection (LRP)


    Price risk insurance coverage for hogs, fed cattle,
    feeder cattle, and lamb
    Insurance protects against low livestock prices
    70% to 100% guarantees available for cattle and
    hogs, based on CME futures prices

    Econ 337, Spring 2013

    Livestock Risk Protection


    Coverage is available for up to 26 weeks for
    hogs and 52 weeks for cattle
    Works sort of like a put option
    Premiums are subsidized, the government pays
    13% of the premium

    Econ 337, Spring 2013

    Livestock Risk Protection


    Guarantees available are posted at:

    http://www3.rma.usda.gov/apps/livestock_reports/

    Posted after the CME closes each day


    until 9:00 am Central Time the next
    working day
    Assures that guarantees reflect the most
    recent market movements
    Econ 337, Spring 2013

    LRP Example

    Econ 337, Spring 2013

    http://www.extension.iastate.edu/agdm/livestock/pdf/b1-50.pdf

    LRP vs. Futures/Options


    Futures and options have fixed contract
    sizes
    Hogs: 400 cwt. or about 150 head
    Fed cattle: 400 cwt. or about 32 head
    Feeder cattle: 500 cwt., 60-100 head

    LRP can be purchased for any number of


    head or weight

    Econ 337, Spring 2013

    LRP vs. Futures/Options


    Futures hedge or options can be
    offset at any time before the
    contract expires
    LRP can not be offset, once you
    buy the coverage, youre locked
    in
    Econ 337, Spring 2013

    Livestock Gross Margin (LGM)


    Insures a margin between revenue and cost
    of major inputs for cattle, hogs, and dairy
    Protects against decreases in cattle/hog prices
    and/or increases in input costs
    Hogs
    Value of hog corn and soybean meal costs

    Cattle
    Value of cattle feeder cattle and corn costs

    We talked about dairy earlier in the semester


    Econ 337, Spring 2013

    Livestock Gross Margin


    Cattle (coverage for up to a year out)
    Calves
    Yearlings

    Hogs (coverage for up to 6 months out)


    Farrow to finish
    Finishing feeder pig
    Finishing SEW pig

    Econ 337, Spring 2013

    LGM Guarantees for Hogs


    Farrow to Finish
    Gross margin per hogt =
    2.6*0.74*Lean Hog Pricet - 12 bu. * Corn Pricet-3
    - (138.55 lb./2000 lb.) * SoyMeal Pricet-3

    Finishing
    Gross margin per hogt =
    2.6*0.74*Lean Hog Pricet - 9 bu. * Corn Pricet-2
    - (82 lb./2000 lb.) * SoyMeal Price t-2

    SEW
    Gross margin per hogt =
    2.6*0.74*Lean Hog Pricet 9.05 bu. * Corn Pricet-2
    - (91 lb./2000 lb.) * SoyMeal Price t-2

    Econ 337, Spring 2013

    LGM Guarantees for Cattle


    Yearlings
    Gross margin per headt =
    12.5*Live Cattle Pricet 7.5*Feeder Cattle Pricet-5
    - 50 bu. * Corn Pricet-2

    Calves
    Gross margin per headt =
    11.5*Live Cattle Pricet 5.5*Feeder Cattle Pricet-8
    - 52 bu. * Corn Pricet-4

    Econ 337, Spring 2013

    Livestock Gross Margin


    Has deductibles, like car or home
    insurance
    For cattle, deductibles from $0 to $150
    per head by $10 increments
    For hogs, deductibles from $0 to $20 per
    head by $2 increments
    Example premiums available at:
    http://www.iaii.us/

    Econ 337, Spring 2013

    LGM-Swine Farrow-to-Finish,
    Feb. 2012
    April

    May

    June

    July

    August

    Gross
    Margin

    $78.74

    $93.20

    $91.74

    $91.59

    $90.59

    Lean Hog
    Price

    $89.88

    $98.83

    $99.57

    $99.66

    $99.25

    Corn Price

    $6.05

    $6.22

    $6.40

    $6.42

    $6.43

    Soybean
    Meal Price

    $311.70

    $322.15

    $332.60

    $333.85

    $335.10

    Econ 337, Spring 2013

    LGM Example
    Say we insure 100 hogs in April and
    choose a $2 deductible
    Our LGM policy is protecting us against
    gross margins below $76.74 per head
    When April comes, the insurance
    company will compute the actual margin
    using the same formula as was used for
    the guarantee

    Econ 337, Spring 2013

    LGM Example
    If the lean hog price fell to $88 per cwt., the
    corn price fell $6.00 per bu., and the soybean
    meal price stayed at $311.70 per ton, then the
    actual gross margin is
    Actual gross margin per hogt =
    2.6*0.74*$88 - 12 bu. * $6.00 - (138.55 lb./2000 lb.) * $311.70
    = $75.72 per head

    Per head indemnity = $76.74 - $75.72 = $1.02

    Econ 337, Spring 2013

    LGM Issues
    Only available on the last business
    Friday of the month
    Is a complicated insurance policy
    Works like an Asian basket option
    Asian = uses a price average
    Basket = covers more than one commodity
    Like a put on cattle/hogs and calls on feeder
    cattle, corn, and soybean meal

    Econ 337, Spring 2013

    Who can benefit from


    LGM/LRP?
    Producers who depend on the daily cash
    market or a formula related to it.
    Producers with low cash reserves.
    Smaller producers who do not have the
    volume to use futures contracts or put
    options.
    Producers who prefer insurance to the
    futures market. No margin account.
    Econ 337, Spring 2013

    Some Risks Remain


    LRP, LGM do not insure against
    production risks
    Futures prices and cash index prices
    may differ from local cash prices
    (basis risk)
    Selling weights and dates may differ
    from the guarantees
    Econ 337, Spring 2013

    Class web site:


    http://www.econ.iastate.edu/~chart/Classes/econ337/
    Spring2013/

    Remember, exam due on Tuesday.

    Econ 337, Spring 2013

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