Livestock Insurance

Relating to Dairy Revenue, LGM and LRP

Monday, 31 January 2022 10:11

Livestock Insurance Charts for TradingView

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We have assembled charts for Dairy Revenue, Livestock Gross Margin Dairy, Livestock Gross Margin Cattle and Livestock Gross Margin Swine. These charts are great for visulizing current and historical Dairy Revenune Expected Prices; as well as, estimated default value Livestock Gross Margin prices.

Import these charts in your TradingView watchlist and use with the Livestock Boss Indicator to isolate better buying opportunites for your livestock risk management needs.


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Tuesday, 25 January 2022 12:16

How to buy LRP like a Boss!

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Let’s face it, it’s hard to know exactly when to buy or sell commodities. I remember when I was younger, I would hear commodity prices on the farm report on the radio. I suppose I understood that prices were constantly moving but I never thought about target prices or historical prices. I really didn’t understand why prices would move higher or lower day to day or understood price action from a non-supply and demand perspective. I suppose I was ignorant to it at the time and limited via technology back then; however, I did eventually subscribe to DTN to get a glimpse of charting. Regardless, with today’s access to readily available data and technology it is easier than ever to follow and understand the commodity markets better. Barchart has great tools, but I have found Tradingview to be very helpful. With that said I want to introduce you to how I use Tradingview to help analyze commodities; more specifically how to use it to make better risk management decisions with emphasis on Livestock Risk Protection, but also Livestock Gross Margin, Darity Revenue, cash, futures, and options.

A few indicators are all you need to isolate better buying opportunities for Livestock Risk Protection as illustrated below. This set of indicators will help you identify specific entry points into Livestock Risk Protection, Livestock Gross Margin or Dairy Revenue if desired. The first step is creating a TradingView account. You will want to do this to be able to change your symbols (i.e., Feeder Cattle, Live Cattle, Lean Hogs, etc..) and create automated alerts of the signal on your desktop, email, or SMS. Once you have a TradingView account setup then navigate to a chart and add the appropriate symbol on a daily interval to begin displaying prices. Next you will add the Slow Stochastic indicator, the Williams%R (%R), Relative Strength Index (RSI) and Moving Average (MA). You will want to configure the Williams%R "Length" settings to 30, configure the RSI "Length" settings to 2 and configure the MA "Length" to 34. The slow stochastic settings can remain at the default settings.

Now that you have these indicators settings, you will be able to visualize when prices are trending and at key overbought levels that present opportune times for making LRP, LGM or Dairy Revenue purchasing decisions. Let's discuss how to utilize these key indicators. The primary indicator we want to focus on is the slow stochastic. When the slow stochastic is greater than 80 prices are considered to be overbought and the possibility exist for prices to reverse and move lower. A signal to buy LRP will trigger when the slow stochastic is overbought and a crossover of the faster series crosses under the slower series. This will be represented via the red down arrow and text indicating to buy. In analyzing the charts, you will easily see how this indicator and trigger signals higher prices; however, it’s worth noting that in an up-trending market the slow stochastic can stay above the overbought (80) threshold for several bars resulting in several signals each higher than the previous. As a rule, when closing prices are above the MA and the MA is rising sharply use a 3-bar consecutive close of the Williams%R below -20 as the entry trigger. If the Williiams%R closes under -20 for two consecutive days and on the 3rd bar closes back above -20 the uptrend is likely still intact, and you should revert back to the slow stochastic to trigger a buy signal. Under the later scenario closing prices should also be above the MA. Three consective closes of the Williams %R below -20 signals a potential trend reversal and warrants a good time to buy coverage out of the up-trend.

Lastly, when prices are in neutral or strong downtrends with closing prices below the MA utilize a 2-day RSI above 80 as the trigger until the closing price is again above the MA whereby you can revert to the slow Stochastic. Prices that are in strong downtrends cause both the slow stochastic and Wiliams%R to be below their overbought levels (i.e., 80 and -20 respectively). During these down trending markets utilizing the close of the 2-day RSI above 80 to trigger a buy signal, will help when coverage is critical.

Rules Summary

  1. When closing bars are above MA then wait for slow stochastic to be overbought and crossunder of fast over slow. Signal will trigger.
  2. During strong uptrends where MA rising sharply and %R is above -20 for many bars, wait for a 3-bar consecutive close below -20 to trigger buy
  3. If closing price are below the MA or MA is falling-flat, utilize the 2-day RSI above 80 as trigger to buy.

If setting this all up sounds too confusing, then SUBSCRIBE and get access to the LRP Boss Indicator to automate buy signals in real-time. Check back daily for signals or use automated desktop, email, or SMS alerts to automate your buying signals. TradingView has a great mobile app as well so that you can keep a keen eye on the chart and indicator as needed while you are away from your computer.

How do you get started?

  1. Subscribe to one of Agrestic Research's Plans and add the optional Indicator.
  2. Sign Up for Trading View
  3. Send us a Support Ticket with your TradingView Username and email used to register so we can grant access to the inidicator.
  4. Optional - Schedule White Glove Service to configure alerts and give quick demo if desired.

IMPORTANT NOTE:

Obviously it is best for a producer to understand their breakeven price. Likewise, it is always wise to not get let your coverage lapse. Be sure to understand your marketing window and match up to your buying to the LRP endorsement length. The frequency of triggers/signals happen often with several opportunities to establish coverage. For those with time to buy, use the strong up-trends to your advantage. If the market is sideways to down, don't get caught without coverage. Use any of the aformentioned signals to establish coverage.

Livestock Boss Indicator

Livestock Boss Indicator by shardison on TradingView.com

HOW TO: Understanding the Livestock Boss Indicator

HOW TO: Understanding the Livestock Boss Indicator by shardison on TradingView.com

Tuesday, 04 January 2022 13:40

How to use Dairy Revenue Expected Price Seasonals

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At Agrestic Research we provide Dairy Revenue expected price seasonals for both Class III and Class IV Milk independently. Dairy Revenue producers can elect a weighted combination of Class III and Classs IV milk prices; however, for simplicity our seasonal analysis on the expected prices are limited to 100% Class III or Class IV milk prices for each respective quarter. With that said the question remains--how can producers utilize the expected price seasonal patterns for the class price options? As an example lets examine the class price option for Class III milk for the April-June/Year2-Qtr2 (803) time period. Under Dairy Revenue, producers have the option to purchase up to 8 quarterly periods beginning with the new reinsurance year which begins July 1st. Our seasonal charts for Dairy Revenue illistrate an event marker for both the new reinsurance year and the final sales close date. In this example quarterly periods for Dairy Revenue are endorsed under the 2022 reinsurance year and each quarterly period sales close ends on the 15th of the month prior to the quarterly coverage period. For example, the April-June/Year2-Qtr2 period final sales close is March 15, 2022. Notwithistanding, coverage for this quarterly period can be purchased beginning July 1, 2021 through March 15, 2022. As illistrated in the 100% weighting - Class III price option for the April-June/Year2-Qtr 2 (803) period seasonal chart below, seasonaly speaking the most prominent timeframe for buying coverage for this period is near August 11, 2021. Keep in mind that we are making no gurantees that this timeframe will yield the abosolute highest price for establishing coverage, we are only illistrating that short-term, medium-term and long-term price patterns suggest that prices tend to be higher during this timeframe than other times in the cycle. Likewise the 5 year seasonal pattern also tends to peak in January; however, a general rule of thumb is to validate seasonal patterns with longer term patterns to achieve overall significance. Also, keep in mind that our seasonal patterns are indexed and do not represent any actual price point, yet provide a relationship to the average high and or low point within a period of time. Hence, anytime you have the opportunity to establish coverage at net profitable margins, it makes sense to do so regardless of the seasonal patterns.

Figure 1:April-June/Year2-Qtr 2 (803) Dairy Revenue Seasonal.
Apr-June/Yr2-Qtr2 Dairy Revenue Seasonal
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Wednesday, 01 December 2021 08:21

How to use a Livestock Gross Margin Seasonal

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In contrast to a standard price chart, a seasonal chart depicts the average price pattern of a specific commodity in the course of a calendar year. Livestock Gross Margin (LGM) is a combination of futures contracts computed as the difference between the value of one commodity and a combination of other commodities. For example, LGM Dairy is computed as the difference between milk and a combination of corn and soymeal represented using the default formula: Milk (t) - Corn(t)/100*2000/56*0.014-0.002*Soymeal(t). Each commodity contract has its own seasonal patterns individually and each price component within the LGM formula can be utilized to compute an LGM seasonal pattern.

We here at Agrestic Research have developed these LGM Seasonals and provide to our subscribers. The question is why would we want to understand the seasonal pattern of the LGM products?

Lets use LGM Dairy as our use case to help answer the aformentioned question. LGM Dairy is sold on the last buisiness Friday of each month. A producer can sign up for LGM Dairy 12 times each year and insure milk production they expect to market over a rolling 11-month insurance period. The insurance period contains the 11 months following the sales closing date. For example, the insurance period for the January 29 sales closing date contains the months of February through December. Coverage begins the second month of the insurance period, so the coverage period for this example is March through December.

A producer does not have to insure all milk for the year within 1 insurance period, but must select a miniumum of 2 months within an insurance period.Hence, the potential to more timely insure a gross margin exist specifically if we can isolate the timeliness of buying coverage each month as it relates to a higher gross margin during the season. For example lets look at the March LGM Dairy seasonal in Figure 1 below.

Remember the January sales close date occurs on the last business Friday of the month (i.e. 1-29 in this case).Time of the following calendar day. In Figure 1 below the sales close date is highlighted by the vertical green line. The seasonal at this point in time is near the lower cycle of the pattern, hence purchasing coverage for the month of March may not be the best option since on average this 15 year pattern is for the gross margin to rise into the end of July. Thus the probability of a LGM indemnity is not as likely. NOTE: When buying LGM coverage you are essentially creating a floor for the gross margin whereby you will be indemnified if the gross margin falls below the purchased gross margin. As illistrated in Figure 1, a better time to buy LGM Dairy coverage for the month of March would be the preceding July sales close date as seasonaly speaking the gross margin is at its highest point which allows for establishing coverage at a higher gross margin.

Update: LGM Sales for Reinsurance year 2022 have changed to be on Thursday of each week.

Figure 1: March LGM Seasonal with default values.
March LGM Dairy Seasonal
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Saturday, 07 January 2017 08:08

Understanding a LGM Cattle Crush

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Believe it or not, but Livestock Gross Margin may just be the alternative your producers are looking for in the wake of high volatility markets and expensive Livestock Risk Protection premiums. Let me explain using an example of LGM-Cattle for yearlings and the current LGM-Cattle margin (crush) for July 2016.

LGM-Cattle insurance covers the feeding margin only; it does not cover production risk such as mortality or poor feeding performance. LGM-Cattle places a floor price under the margin, computed as the difference between the value of fed cattle and a combination of feeder cattle and corn values. As such, the coverage is similar to hedging the “cattle crush,” except LGM-Cattle bundles option-style coverage together accounting for correlation among the components. The margin does not cover costs apart from cattle- and corn-related charges. Thus fixed costs and other variable costs could increase and not be protected by LGM-Cattle. It may be attractive as a tool for those who retain ownership or are considering doing so in the future. Cattle feeders and commercial feedlots may also be interested in LGM-Cattle.

LGM-Cattle has two different types of endorsements: one for those finishing yearlings and one for those finishing calves. Coverage for yearlings is designed for 750-pound feeder cattle to be finished to 1,250 pounds. Coverage for calves is designed for 550-pound feeder cattle to be finished to 1,150 pounds. Feed use is a fixed corn (or corn-equivalent) amount. Producers can purchase coverage during a sales window that occurs at the end of a month to cover cattle to be finished over the next 11 months. Producers estimate how many head they will market (and insure) by month for the insurance period.

Livestock Gross Margin (LGM) is a bundled basket of commodities that eliminates buying/selling individual futures contracts to provide a hedge

Margin Example

The expected margin follows a formula dependent on whether the coverage is for yearlings or calves.The LGM-Cattle margins are computed for a given month as follows:

  • Expected Margin (yearlings) t = 12.5 cwt * Live Cattle t – 7.5 cwt * Feeder Cattle t-5 months – 50 bu. * Corn t-2 months
  • Expected Margin (calves) t = 11.5 cwt * Live Cattle t – 5.5 cwt * Feeder Cattle t-8 months – 52 bu. * Corn t-4 months

The live cattle, feeder cattle, and corn prices for a given month are the respective average futures prices from the last three trading days of that month. In non-contract months the commodity price is calculated using a weighted average of surrounding contract month prices.

In the above margin calculation example for the yearlings and using July 2016 as the marketing period the calculation would look like this:

  • Expected Margin (yearlings) July2016 = 12.5 cwt * Live Cattle July2016 – 7.5 cwt * Feeder Cattle February2016 – 50 bu. * Corn May2016

Note that because no futures contracts are available for July Live Cattle or February Feeder Cattle then the average of the 2016 June Live Cattle and 2016 August Live Cattle futures are used for the Expected Live Cattle Price, while the 2016 January Feeder Cattle and 2016 March Feeder Cattle futures are utilized for the Expected Feeder Cattle Price.

A good tool for checking the LGM-Cattle margins is located here. Alternatively, one can build an estimated LGM-Cattle margin using a charting packages such as www.tradingview.com. I have taken the liberty of constructing the LGM-Cattle margin for July 2016 in TradingView. Figure 1 below illustrates this July 2016 LGM-Cattle margin. The important note using this method is that this is only an estimated margin and not true to the actual LGM Commodity Exchange Endorsement that outlines the price measurement period for each futures contract (i.e. this method does not account for only the last 3 trading days of the month, but instead calculates using the last settlement for unexpired contracts). Hence this is only for estimating margins and visualizing them graphically.

The takeaway from Figure 1, is that the July 2016 LGM-Cattle margin is currently higher than it has been in over a year. Even more so, when comparing the current premiums for LRP Fed Cattle with a target weight of 12.50 cwt. and ending in Jul, the LGM-Cattle premiums for the month of July on a per head basis with a zero dollar deductible is cheaper. As of 12/16/2015 LRP fed cattle at the highest coverage level (.9917) and price of $115.50 cost $85.44 per head. In turn the estimated LGM-Cattle premium for the January-November insurance period for cattle marketed in July is $62.80 per head. If at the end of the insurance period, the Actual Gross Margin is less than the Expected Gross Margin an indemnity payment would be due.

Figure 1) Estimated LGM-Cattle Margin (crush)

Livestock Gross Margin Cattle Formula

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