Tim Petry, NDSU Extension Service, Published April 06 2012
Spotlight on Economics: LRP - Crop insurance for livestockMost market classes of livestock set record high prices in 2011 and record high prices also are occurring in 2012. However, record price volatility and uncertainty also exist.
A relatively new price risk management tool available to livestock producers is livestock risk protection (LRP) offered by the U.S. Department of Agriculture's Risk Management Agency (RMA).
A variety of crop insurance policies have been offered since being approved by Congress in 1938. LRP was authorized by the Agricultural Risk Protection Act of 2000 and offered as a pilot program to swine producers in Iowa. Since then, LRP has been expanded to include several market classes of feeder cattle, fed cattle, swine and lambs. LRP is available to cattle and swine producers in 37 states and lamb producers in 28 states.
LRP was designed to insure against declining market prices and functions similarly to the futures market put options. However, the insurance contract is purchased from an approved crop insurance agent instead of a futures market broker.
LRP insurance is market-based, so coverage prices and premiums change daily. Producers select coverage levels that range between 70 and 100 percent of an expected price, which is similar to futures market options strike prices. Coverage prices and premiums are posted daily on the RMA website at http://www3.rma.usda.gov/apps/livestock_reports. RMA subsidizes the premiums by 13 percent, so the actual cost is lower than shown in the table.
LRP contracts may be especially useful for producers with smaller numbers of livestock to be insured against price declines because no minimum number is required. The maximum number that can be insured in a crop year (July 1 through June 30) is 2,000 feeder cattle, 4,000 fed cattle, 32,000 swine and 28,000 lambs.
Not enough space exists in this column to explain the details of LRP. More information is available at http://www.rma.usda.gov/livestock. LRP presentations are available on my website at http://www.ag.ndsu.edu/livestockeconomics/presentations.
I have been conducting research on LRP strategies on North Dakota feeder cattle since contracts became available in October 2004 and lambs since contracts were offered in September 2007.
One strategy involved buying an LRP contract on July 15 each year for less than 600 pound feeder steers to be marketed on Nov. 15. Cash market prices for calves usually decline seasonally from July into November. In years 2005, 2010 and 2011, LRP contracts did not pay indemnities using this strategy. Both 2005 and 2011 were record high price years for steer calves in North Dakota, and contra- seasonal increases in prices occurred in all three years.
In 2006, the LRP strategy added $5.38 per hundredweight to the cash market price for less than 600-pound steers after paying the premium. It added $1.35 in 2007, $14.55 in 2008 and $5.51 in 2009. These years experienced normal seasonal price patterns.
So, LRP offers price protection when prices fall and producers receive higher prices in the marketplace when prices increase.
Petry is a livestock marketing economist for the NDSU Agribusiness and Applied Economics Department