Updates Make LRP Better Risk management Tool
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Tight margins resulting from increasing expenses mean price is top of mind for producers. Fortunately, federal subsidies for Livestock Revenue Protection (LRP) have increased for cattle and swine and producers can protect against price drops at a more affordable cost than in the past.
Some additional adjustments have further improved LRP, making it a more useful risk management tool. It’s not often that livestock producers have an improved way to manage risk, so here I will explain LRP and how the changes work for today’s livestock operations.
LRP has been around for a number of years and is designed to establish market price floors for fed cattle, feeder cattle and swine. This in turn, gives producers some price stability in volatile commodity markets. LRP settles on cash index reports, helping to account for basis and not just futures.
LRP works well for producers who buy cattle to feed or graze, then re-sell. In these operations, LRP can protect margins; however, producers need to know what their break evens are to properly implement LRP. Cow-calf producers buy LRP to lock in a price floor without committing to a price on their calves.
LRP is appropriate for operations of all sizes. It can be used for a minimum of one head all the way to the maximum of 12,000 each crop year. Producers also can insure up to 6,000 (of their 12,000) in a single endorsement.
Price protection is available Monday through Friday when USDA’s Risk Management Agency (RMA) releases coverage prices. In order for LRP to be available, prices must be released by 4:30 p.m. central standard time and any LRP endorsements must be completed by 9 a.m. the following morning.
The day of purchase, producers can lock in 70% to 100% of the expected ending value up to 52 weeks out. Producers align their LRP policy to the period when they will actually sell their livestock on the market. As an example, if a producer ships fed cattle to slaughter in June, the endorsement would be set to end in June. At the end of the coverage period, the producer would be notified if an indemnity had been triggered. When futures markets move higher, LRP coverage prices also will trend higher.
In an environment like today, when market conditions are volatile and weather extremes more common, LRP can give producers peace of mind.
Not Your Father’s LRP
More producers are taking a second look at LRP as a result of USDA changes the last few years. The most significant improvement has been the increase to the subsidy level, but we’ve also seen the premium billing date pushed back and increases to head limits. Below are the improved subsidy levels.
Previous Subsidy Rate
|Current Subsidy Rate|
With the number of catastrophic events the markets have seen the past few years, it’s important to find a sustainable place in your budget for risk management. At FCSAmerica, we find it is best to add risk management costs to the breakeven cost of the animal. Wherever you account for it, the cost of managing risk might be less than in the past.
Cash flow also is an important consideration for producers, and USDA addressed this issue with LRP by moving the due date for premium payments to the end of the insured term vs. the upfront payments of yesteryear. This allows producers to pay an LRP premium once they have sold their livestock or net out premium from payments due to them.
Some additional changes include:
- The livestock ownership requirement now allows the insured to dispose of livestock up to 60 days prior to coverage end The insured must have ownership at the start of coverage.
- Policy can possibly cover livestock not yet born on the effective date but expected to be marketed before the end
How LRP Works
Here is a recent example of the protection offered by LRP. In August 2021, a producer bought a 13-week feeder cattle endorsement to cover 250 head of 900 lbs. steers. The producer guaranteed a market price floor of $1,485 per steer and we realized settlement value of $1,400. The producer was paid more than $12,000 by the LRP policy.
- Beginning Date: August 3, 2021
- Market Guarantee (floor): $1,485/head
- End Date: November 2, 2021
- Settlement Value: $1,400
- Total Premium: $9,000
- Total Indemnity: $21,127
- Net Payment to Producer: $12,127
Looking forward, there are some opportunities to consider. On November 16, 2021, LRP levels provided a market guarantee of $1,547 for 900 lbs. steers ending in the month of August 2022. The premium for covering a steer at $1,547 was $57/head. An alternative risk management strategy of buying a put option on the Chicago Mercantile Exchange (CME) would have cost about $76.50/head. A simple comparison of those strategies shows a difference of $19.50/head.
Utilizing our 250 head in the example above, that equates to a difference of $4,875.
Written By: Landon Nelson, Insurance Services Officer, Farm Credit Services of America