The Livestock Gross Margin (LGM) policy gives Iowa pork producers a new alternative for insuring against a loss in revenue. Under the policy, if the actual gross margin between feed prices and pork prices at the time the hogs are sold is less than the margin guarantee, an indemnity is paid.

Many marketing tools available to pork producers are tailored to larger operations, which often puts small or medium-sized producers at a disadvantage. The Livestock Gross Margin policy helps level the playing field with features that may offer more appeal over traditional options used to protect your profit margin.

Under the LGM policy, the sales deadline is July 31 for the fall insurance period of August 1 to January 31. The spring insurance period is February 1 to July 31 with a January 31 sales deadline.

As a pilot program for Iowa pork producers, only a limited number of policies will be sold. While this allows for program integrity, it also means you must make a decision soon.

How LGM Works

1. Expected Prices Are Determined
   1. Expected prices for hogs, corn, and soybean meal are established in the three trading days prior to January 14 for the spring insurance period and July 14 for the fall insurance period (July 10-12, 2002).
   2. Months with futures contracts for the applicable commodities use the average of the expected prices of immediately surrounding months, during the same three trading days.
   3. The Chicago Mercantile Exchange lean hog futures cotnract is used to set the hog price.
   4. The lean hog futures price is multiplied by 0.74 to convert to a live weight basis.
   5. The Chicago Board of Trade corn and soybean meal futures contract are used to set the corn and soybean meal prices.
2. Identify Target Marketings - Approved marketings must be no more than the lesser of:
   1. Farm swine capacity for the six-month insurance period,
   2. or 135% of the average monthly marketings from the previous insurance period,
   3. or 15,000 head.
3. Select a Coverage Level
   1. Options include 80%, 85%, 90%, 95%, or 100%.
4. Gross Margin Guarantee is Determined
   1. Expected gross margins (expected hog price minus feed costs) are calculated for each month of the insurance period and then added together to determine the Expected Gross Margin for the six-month insurance period.
   2. The Expected Gross Margin is multiplies by the Coverage Level to calculate the Gross Margin Guarantee.
5. Actual Prices Are Determined
   1. Actual prices are determined on the last three trading days prior to the expiration date of the applicable futures contract.
   2. Months without futures contracts for the applicable commodities use the average of the actual prices of immediately surrounding months on the last three trading days of the contract.
6. Actual Gross Margin Calculated
   1. Actual gross margins are calculated for each month and added together to determine the Actual Gross Margin for the six-month insurance period.
7. Loss Payments Determined
   1. A loss occures when the Actual Gross Margin is less than the Gross Margin Guarantee.

< Back to Crop Insurance Page