By Jay Parsons and Jim Jansen
Several enhancements and improvements to the Livestock Risk Protection (LRP) insurance program will take effect on July 1, 2019. LRP is an insurance contract offered by the USDA Risk Management Agency (RMA) to help livestock producers protect against unexpected down swings in market price.
One change is that LRP insurance coverage for fed cattle, feeder cattle, and swine is expanding to include all 50 states. Several other changes will be of particular interest to Nebraska cattle producers.
- LRP premium subsidies will increase from the current 13 percent for all coverage levels to a range from 20 percent to 35 percent based on the coverage level selected.
- The per head limits will increase from the current levels of 1,000 head per coverage endorsement and 2,000 head per producer per year (July 1 to June 30) to new levels of 3,000 head per coverage endorsement and 6,000 head per producer per year.
- Chicago Mercantile Exchange (CME) trading requirements are being updated to allow for more insurance endorsement lengths to be offered to producers to purchase. Currently, a daily volume of five traded contracts is required to offer LRP endorsements.
- The Price Adjustment Factor for predominantly dairy cattle is being modified to 50 percent for both weight ranges of Feeder Cattle to more accurately reflect market prices. The current adjustment factors range from 80-85 percent based on weight class.
Price and market uncertainties pose a significant risk to cattle producers with a substantial amount of money invested in breeding livestock, land, and other infrastructure. Price protection through an insurance tool like LRP could be an important risk management tool for producers to protect that investment. Like most insurance products, producers should not purchase LRP hoping to collect on it. All else being equal, the preference is for good, strong market prices to prevail. However, it should be of interest to producers considering the need for market price protection to see how LRP has performed over the years.
LRP is available in many forms, terms of length, and coverage levels. For the purposes of this article, we analyzed the LRP feeder cattle contract for steer calves weighing less than 600 pounds from 2009-2018. We looked at a 13-week coverage endorsement taken out on August 6 (or the subsequent Monday if August 6 was on a weekend) of each year at the highest coverage price available. This resulted in an ending date of November 5-7 of each year. The premiums reported here are the producer premiums after the 13% subsidy was been paid by the USDA under the current policy rules.
As shown in Table 1
, over the ten years analyzed, total producer premiums collected exceeded indemnities paid out by an average of $1.15 per cwt. The indemnity ratio over these ten years was 0.68 meaning that if a producer consistently insured the same quantity each year, each $1.00 in premiums paid into the program would have yielded $0.68 back in indemnities. Over the ten years, actual ending values were greater than expected six times and less than expected four times but in 2010 when it was less than expected it was not below the highest coverage level available and no indemnity was paid out. The last two rows in table 1, show what the results would have been had the new higher subsidy rates been in place. The increased subsidies would have reduced the producer premiums by an average of $0.63 per cwt. and increased the indemnity ratio to 0.83 over this ten year time span.
The primary purpose of LRP insurance is to provide producers with a tool to protect against unexpected downward price movements in the national market. In 2009 and in 2016, in particular, it did its job well. The hope is that prices are strong and it is not needed. However, for producers who are concerned about the markets moving against them, it can be a valuable tool that helps meet their risk management goals for protecting returns. With the upcoming changes to the program, it becomes a more affordable and available tool for producers to incorporate into their marketing programs.