Little boys and girls want to be cowboys. But today cowboys want to be anything other than that. Cattle are dying from the heat. Pasture land is drying up and burning up. Corn may be cheap this fall, but will be higher priced next year because of growing ethanol demand. And we are just beginning the 10 year cycle of cattle expansion. Do you get out, or do you manage your risk? Look at the calendar; today is the last business day of the month, and that is important for your future.

Let’s set the table, since you are getting the full meal deal here:

Where are we in the markets? Darrel Mark at the University of Nebraska analyzes the latest USDA Cattle on Feed report and says, “The increased placements of lighter weight cattle suggest some light stockers may be coming off grass early and that early weaning may be taking place. Both would be due to drought conditions. Thus, supplies of feeder cattle may be tighter than expected this fall. Further, it points to increased slaughter numbers for the first quarter of 2007 that may pressure fed cattle prices.”

So in the spring of 2007, fed cattle prices are going down when corn prices are going up. Cowboys will be caught in the old cost-price squeeze. But you apparently are already there according to Dillon Feuz at Utah State. His price analysis indicates the average of the last 4 years, there has been a $49 profit per head. In the last 13 weeks, there has been a $97 per head loss. Last week’s loss was $110 per head. That is not a trend that will keep you in business and your banker happy.

So how do you protect your margins? Here on the last business day of the month, that is the PERFECT question for a cowboy to ask.

If you have cattle in these 20 states: Colorado, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Montana, Nebraska, Nevada, North Dakota, Ohio, Oklahoma, South Dakota, Texas, Utah, West Virginia, Wisconsin and Wyoming, then you are eligible for Livestock Gross Margin Insurance (LGMI). If you are not familiar with it, it is crop insurance for cowboys, that is subsidized by the USDA, compliments of the US taxpayer.

LGMI will provide an indemnity payment as a protection against a decline in cattle feeding margins. It covers your cost of feeders, your cost of corn and then protects you from a decline in live cattle prices. This full meal deal is a substitute for either hedging all of those or buying option premiums for all of those. The University of Nebraska has a complete fact sheet on LGMI which you should either bookmark or print, because it may be the risk management tool that keeps you in business.

Nebraska economists Darrel Mark and Josie Waterbury outline the background for LGMI, saying its indemnity payment will kick in when your margin disappears:
1) As this margin narrows, the insurance indemnity payment becomes larger to offset lower revenues or increased costs.
2) LGM for Cattle has an 11-month insurance coverage period, allowing producers to establish target marketings in any of the 11 months except the first month.
3) Indemnity payments are based on a Gross Margin Guarantee (GMG) and a total Actual Gross Margin (AGM).
4) The GMG is the total cattle feeding margin for the 11 months of target marketings that producers insure when they purchase the policy.
5) The total AGM is the cattle feeding margin that actually occurred in the market after the 11-month coverage period.
6) At the end of the 11-month insurance period an indemnity is paid to the producer if the total AGM exceeds the GMG.
7) The GMG and AGM are based on adjusted futures prices and state and month-specific basis levels.

What is this deal about “the last business day of the month?” That is today, by the way, and is the day USDA’s Risk Management Agency confirms the statistics that go into the formula determining the Gross Margin Guarantee. You will have a deductible, like any insurance policy, but that ranges from $0 to $150 per head. There are also limits on the number of head of cattle that can be insured.

You need to know that this insurance does not cover death of cattle, and you probably already have protection there. You also need to know about basis exposure, since LGMI is a function of the futures market price, and you are selling your cattle into the cash market. Mark and Waterbury say, “Even though each policy uses a state and month-specific basis, LGM basis is the difference between the adjusted futures price (including the policy’s fixed basis) and the local cash selling price producers actually receive (using local basis).”

USDA provides a set of questions and answers about the LGMI policy.

USDA also provides copies of the forms that need to be filled out, along with explanations. These are good to have before signing up.

USDA also provides a copy of the actual policy that will be in force when you apply.

USDA also provides a map to find agents providing livestock pricing insurance policies.

Summary:
If you are a cattle feeder, worried about declining prices of cattle, rising prices of corn, and the complexities of the market due to the drought, you are a candidate for the new Livestock Gross Margin Insurance underwritten by USDA, and sold by commercial insurance agents. The LGMI protects against price increases for feeder calves and corn, and price declines for heavy cattle. The insurance program is available throughout the year, but signup is only available on the last business day of the month, after a series of calculations have been made about the futures prices for the calves, corn, and finished cattle.