Recent volatility in the beef cattle market has had producers guessing what the market will do next, with prices fluctuating between all-time highs and rapid declines. The level of uncertainty was worrisome to many, but not to Idaho cattle producer Bob Howard.
“I put a price floor on my calves using the Livestock Risk Protection (LRP) policy. You can’t believe how many good nights of sleep I have gotten knowing I was covered, no matter how far the market fell. For roughly 2 to 4 percent cost to guarantee a really good price and not cap my upside potential, this is a no-brainer.”
That no-brainer has more impact on the producer’s bottom line today than it has in recent history. In today’s market, where $260 per hundredweight (cwt) on feeder calves is not unheard of, a 10% drop in price equates to a $26 per cwt decrease, or $182 per head loss (based on 700-pound steers). Contrast that to past years, where the average price per hundredweight was in the $150-per-cwt range and a 10% drop only meant a loss of $15 per cwt, or roughly $105-per-head loss. With that amount of potential income on the line, now is a great time to consider LRP.
This past year’s historic highs and dramatic drops in the cattle market are just one example of how crop and livestock insurance can be a critical risk management tool for producers. LRP coverage, implemented consistently, helps to ensure the success of cattle operations and offers peace of mind – regardless of external factors. Though the market has seen historic highs throughout the past 18 months and indicators point to favorable prices in the future, cattle prices are not impenetrable. This was demonstrated last fall when market prices experienced a significant drop shortly after the release of the October USDA Cattle on Feed report (Figure 1). External factors that no one sees coming can create drastic swings in the market, and LRP insurance is one way to insulate cattle operations against unknown impacts.
What is LRP?
Livestock Risk Protection can be used to insure against a decline in prices on fed and feeder cattle, including unborn calves, using current futures prices as set by the Chicago Mercantile Exchange (CME). This allows producers to set a price floor and mitigate risk from national marketplace volatility. LRP strictly protects against declines in the national price index. It does not protect against mortality, condemnation, physical damage or disease.
Why utilize LRP?
LRP can be a valuable risk mitigation strategy for any size producer. Not only does it protect against a decline in cattle prices by allowing producers to set a price floor, but it also leaves the top side open. This means that if the market price goes higher, producers are not locked into a price and can take advantage of the price increase. This is all while maintaining cash efficiency because premiums are due after the endorsement settles with no margin calls or unexpected bills.
Who can buy LRP?
This insurance product can be used by any operation that has ownership in cattle being raised for beef, including cow-calf and stocker operations, feedlots and dairies with beef programs.
Customize your coverage
- LRP is available to purchase on most business days when the futures market is open.
- LRP is subsidized up to 35% at the top coverage level (100% coverage), making risk management for U.S. cattle producers more affordable.
- Coverage levels range from 75% to 100% of the daily published expected ending value derived from CME futures, not local markets. LRP offers the highest coverage level of any crop insurance product with no deductible when insured at 100%.
- Endorsement period lengths are the following: 13, 17, 21, 26, 30, 34, 39, 43, 47 or 52 weeks.
- Maximum number under one endorsement per type: 12,000 head.
- Maximum number insured per crop year per type: 25,000 head.
- Minimum number under one endorsement: One head. A producer does not need to insure 100% of their cattle.
Daily sales
LRP is a daily insurance product. When you want to lock in coverage, signed paperwork must be received by 7:25 a.m. MT. Your livestock insurance agent should keep you informed about price movements and help facilitate binding coverage to make this process easy to adopt for your operation as a valuable risk management tool.
Estimated adoption rate
Producers across the country have seen the value of LRP, and adoption of the program has significantly increased over the last four years, as illustrated in Figures 2 and 3. This is due to several factors including higher cattle prices and favorable changes to the program.
Additional crop and livestock insurance products
In addition to LRP, other insurance products that are beneficial for livestock producers may include the following:
- LGM – Cattle: Protects against the loss of gross margin (market value of live cattle less feeder cattle and feed costs) on cattle.
- Pasture Fire: Protects against fire caused by lightning, equipment and weather-related downed power lines on your pasture or rangeland.
- Pasture, Rangeland, Forage (PRF): Protects against a lack of rainfall on pasture, rangeland and forage acres.
Deadlines
Deadlines for crop and livestock insurance programs will vary based on crop and location. In general, livestock coverage typically has a daily cutoff, but please contact an insurance professional for specific information based on your needs.
Visit the website to learn more about these and other insurance programs offered by AgWest Farm Credit. We also host twice-monthly calls that focus on the cattle market, trends and opportunities for producers.
