Livestock Risk Protection Insurance
Listening to Derrell Peel, OSU Extension Livestock Marketing Specialist, speak this past week, one might conclude that profit margins may be a little tighter in the coming year or two. According to Derrell, we may have reached a plateau on the national cow herd expansion and, subsequently, the potential for higher prices. If so, and IF is a big word, it would seem that management and marketing skills will become much more prominent in determining the profitability of the cattle enterprise; or, in a worst-case scenario, minimizing the down-side risks of market prices.
With those thoughts in mind, I found the following comments, courtesy of OSU Extension Area Ag Economist Trent Milack, of particular interest.
Livestock Risk Protection is an insurance product that protects against declines in cattle prices. In the past, the main focus when raising cattle has been on the production side. Arguably, this is still true. However, price is at the forefront of many producer’s minds due to recent cattle market volatility.
Livestock Risk Protection can be purchased through a livestock insurance agent. This product insures between 1 and 1,000 head at a time with a total of 2,000 insurable head per year. The length of the insurance coverage varies from 13, 17, 21, 26, 30, 34, 39, 43, 47, or 52 weeks. Insurance can be purchased on calves, steers or heifers, which fall in the weight classes of Weight 1 (under 600 pounds) or Weight 2 (600-900 pounds).
Coverage levels vary between 70 percent and 100 percent of the expected ending value of the animals. The coverage options available vary each day so it is important for producers to check the RMA website https://public.rma.usda.gov/livestockreports/main.aspx daily to determine which coverage options are available. The ending values of the policy are based upon the weighted average prices reported in the CME Group Feeder Cattle Index. This index is used to settle the Feeder cattle contracts.
An indemnity payment is triggered if the actual ending value is lower than the coverage price. This has nothing to do with what the producer receives for the animals in the cash market when he sells the cattle. Indemnity payments will only occur if the price declines below the coverage level during the coverage period. Also, the producer must own the cattle and have taken delivery of them in order to qualify for the insurance coverage.
An example of the insurance coverage includes a producer who wants to use LRP to put a floor on his 2019 steer crop. He normally sells in the middle of March and his steers currently weigh 500 pounds. His herd consists of 100 predominately Angus cross steers.
The insurance is purchased in October so he needs 26 weeks of coverage. The option he selects includes feeder cattle steers for the 2019 crop year with an expected ending value of $136.794 per cwt. He chooses a 99% coverage level with a coverage price of $135.040 per cwt. The premium will be $6.889 per cwt. He expects the steers to gain 250 pounds over the course of this coverage. The premium is calculated by multiplying the final weight in cwt. by the premium cost per cwt. and the number of head covered. So 7.5 cwt. X $6.889 X 100 hd. = $5,166.75. RMA subsidizes 13 percent of the premium cost so the producer will be responsible to pay $5,166.75 X .87 = $4,495.07.
In the event that on March 31st the actual value is below the coverage price of $135.040 per cwt., an indemnity payment will be triggered. If prices fall to $120.00 cwt., the producer would be paid a premium in the following example. The price decline in this example is $135.040 – $120.00 = $15.04. The producer’s payment is 100 hd. X 7.5 cwt. X $15.04 = $11,280.00. This farmer received an indemnity payment of $11,280.00 on 100 steers for the cost of $44.95 per head. While there is no way to know what the actual ending price will be, this is an option to manage downside price risk.
Perils not covered include death, government seizure, and forced destruction. If one of these events do occur, the producer is required to notify their insurance agent within 72 hours of the occurrence of the loss. By giving notice of the loss, the producer will have the affected livestock included if an indemnity is payable on the endorsement. Not giving notice of the loss will result in the affected livestock being excluded from the indemnity calculation and the premium will not be refunded.
Some producers are aware of hedging and the ways that they can manage price risk in the futures markets. There are many reasons, however, why producers do not utilize this option. They may not have enough cattle to fill an entire contract, they may be reluctant to pay brokerage fees and margin calls, or they just do not understand the complicated world of futures markets and are uncomfortable with that risk management system. Livestock Risk Protection allows a producer to tailor the insurance coverage to the number of cattle he needs to insure at a price where he will remain profitable.
The application for Livestock Risk Protection can be filled out at any time, but insurance does not come attached until a specific endorsement is made. The insurance coverage will begin when a specific endorsement is made and approved by RMA.
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