Livestock Risk Protection (LRP) is an insurance product offered by USDA Risk Management Agency (RMA) and is available for feeder cattle, fed cattle and swine in Alabama. Beginning July 1, 2019, LRP subsidy rates will increase, making this product more affordable for livestock producers.
LRP is designed to offer feeder cattle producers protection from price declines. The LRP participant insures cattle over a chosen time period, choosing an expected ending price and weight. At the end of the specified time period, if the price has decreased below the expected price, the producer collects an indemnity based on the difference. This insurance does not cover cattle death, sickness or any other peril.
LRP insurance is very similar to using options for cattle price protection, with the main difference being no minimum restriction on the number of head enrolled. This provides small producers with an opportunity for price protection outside of futures and options contracts, which are standardized at 50,000 pounds (approximately 60-80 head).
Figure 1 shows the average net payout (indemnities-producer premiums) per head for Alabama feeder cattle enrolled in LRP along with the average annual feeder cattle price. One can start to see the risk management relationship, when prices are high in 2014-2015 average net payouts are at their lowest since prices are moving in the producer’s favor. However, Figure 1 does not provide the full picture as it leaves out timing of purchasing the LRP-Feeder Cattle policies as well as seasonality in feeder calf prices.
Specifics of the LRP-Feeder Cattle Program
LRP-Feeder Cattle insurance can be purchased at any time during the year to insure cattle sales 13, 17, 21, 26, 30, 34, 39, 43, 47 or 52 weeks into the future. LRP coverage options vary daily, so not all week options may be available to be purchased on a given day. To decrease risk, producers should select the closest period to when their cattle will be sold.
Type of Feeder Cattle
Producers must select from the following types of cattle: steers, heifers, predominantly Brahman cattle and predominantly dairy cattle.
Additionally, each type of cattle can be insured for two possible weight ranges: Weight 1: <6.0 cwt, and Weight 2: 6.0-9.0 cwt.
Coverage Prices and Levels
Coverage prices and levels change daily and can be found at RMA’s Livestock Reports site.
Coverage prices are based on the Expected Ending Value of the corresponding CME Feeder Cattle Index. Coverage prices vary by the length of the insurance period, coverage level, and type of feeder cattle insured. Possible coverage levels range from 70-100%.
It is important to note that LRP does not guarantee a cash price. Because LRP is based on the CME Feeder Cattle Index, prices may not be exactly the same as local cash prices, though in most cases they should move together. However, it is possible that your local cash price decreases, while the CME Feeder Cattle Index price increases or remains constant. In this case, you would not collect an indemnity from LRP.
Premium rates differ based on the Expected End Value and Coverage Level. The producer’s premium is calculated as a portion of total insured value as follows:
Insured Value=Number of Head x Projected Selling Weight x Coverage Price
Producer Premium=Insured Value x Premium Rate x (100%-Subsidy Rate%))
Subsidy rates range from 20% to 35% based on the coverage level. The lowest coverage level (70%) receives the highest subsidy rate (35%) while the highest coverage level (100%) receives the lowest subsidy rate (20%).
LRP can be purchased from a crop insurance agent at any time during the year. First, an application must be filled out (required only once), after which a Specific Coverage Endorsement (SCE) can be used to initiate LRP coverage. A producer may have multiple SCE’s as long as the total number of head insured remains under 6,000 for the year. It is important to note there are funding and daily sales limitations on this program, so coverage may not be available if either are reached.
For more information and important links, please see USDA RMA’s LRP Feeder Cattle Fact Sheet: https://www.rma.usda.gov/Fact-Sheets/National-Fact-Sheets/Livestock-Risk-Protection-Feeder-Cattle-2018
To find your certified crop insurance agent, please visit USDA RMA’s agent locator: https://www.rma.usda.gov/Information-Tools/Agent-Locator-Page