Evaluating Hedging Effectiveness with Swine and Livestock Gross Margin Insurance Programs

Abstract

This thesis aimed to analyze the historical performance of Livestock Gross Margin (LGM) insurance products. Effectiveness was measured by whether indemnities paid out were equal to the charged premiums, before USDA RMA subsidies. To measure reductions in downside risk, threshold semi-variance, observed from a set pain point, was considered. Historical expected gross margins, actual gross margins, and premiums were forecasted for the period 2004 to 2020 for LGM Swine and 2006 to 2020 for LGM Cattle. The historical profits per head of livestock were aligned with sales events for reduction of risk analysis. Results suggested that charged premiums were not equal to charged indemnities and net indemnities approached zero dollars for higher deductible levels. The measure of downside risk was reduced for four of the five operation types analyzed as the profit for head decreased.