Livestock Risk Protection (LRP) insurance an option for selling calves | TSLN.com

Livestock Risk Protection (LRP) insurance an option for selling calves

Alaina Mousel, Editor

This story is published in the 2010 Fall Cattle Journal.

As cow-calf producers across the country gear up to sell calves, there’s an option available to cover their bottom line: price protection insurance. Known as Livestock Risk Protection (LRP), this insurance is designed to protect against declining prices.

Randy Buchholz with Heartland State Bank in Tulare, SD, explains that LRPs provide a price floor that can take advantage of higher prices in regard to a given date and time.

“It’s an alternative to futures for farmers to put a floor price under their cattle with the top side open,” Buchholz explains. “The key word is ‘alternative’ because there are other options.”

The other options he’s addressing is utilizing option puts or market futures. Though LRPs work similarly, many cattle producers are not comfortable playing the game of risk and paying for margin calls.

LRPs offer a variety of coverage types, levels and length of contracts which vary daily based off of trading in the futures market. It covers more than just calves, too. LRPs are available for feeder cattle, fed cattle, sheep and hogs. For the purposes of this article, we’ll focus solely on feeder cattle LRPs.

Coverage is available from 13 to 52 weeks prior to the anticipated market date and is available in 37 states, among them: North and South Dakota, Nebraska, Montana and Wyoming. Feeder cattle LRPs offer two different weight classifications: weight class 1, which covers calves under 600 lbs. (calves still on mama cows); and weight class 2, which covers calves 600-900 lbs. (backgrounded calves).

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Here’s how it works. Coverage prices, rates, actual ending values and per hundredweight (cwt.) cost of insurance is updated daily on USDA’s Risk Management Agency (RMA) Web site (www3.rma.usda.gov/apps/livestock_reports). Ending values are based off of the Chicago Mercantile Exchange (CME) Group feeder cattle index.

At the end of August, a 13-week LRP policy had an expected ending value of $127/cwt., set to expire on November 30. Coverage is available at different levels ranging from 70 to 100 percent. With a 99 percent coverage level, it would cost producers $3.81/cwt. to insure feeder steers, weight class 1, get at least $126.04/cwt. The same scenario with a 96 percent coverage level would cost $2.12/cwt. for an expected ending value of $121.64/cwt.; or 87 percent coverage level for $0.49/cwt. locks you in at $110.64/cwt.

South Dakota State University professor of Animal Science Kelly Bruns breaks it down further. Suppose a producer wants to protect their calves for at least $116/cwt. For a 99 percent coverage level at that price, it would cost producers roughly 3 cents per pound, or $3/cwt. To determine the cost of the LRP, producers multiply the “cost per cwt.” by the classification of cattle, such as 700 lbs. “Essentially it will cost you $24 to have an LRP on that animal at a base price of $116/cwt.,” Bruns says.

As you can see, LRPs aren’t free – just like any type of insurance. Regardless of what the market does in terms of actual end market price, producers must pay the premium up front. And premiums increase as the coverage level increases.

“You have to make an investment to get that,” Bruns says. “And that investment may result in payment, if prices go down with the season decrease in the price of calves from August to December.”

Suppose on Nov. 30, the actual market end value was $122/cwt. Producers with the 99 percent coverage level LRP insurance above would be paid the difference of their coverage level ($126.04/cwt.) and actual market end value ($122/cwt.). Conversely, if the actual market end value is higher than the protection level, producers are only out their LRP premium and can take advantage of higher prices.

Producers should note that the actual end value is based off of a 5-day, 12-state average, in the cash market, which can work in favor of producers in the Midwest where feeder cattle prices are generally higher.

What’s appealing about LRPs is there is no minimum number of head required for protection, unlike put options, which generally are higher volume load-lots. For feeder cattle coverage, producers can cover up to 1,000 head of cattle, with a maximum annual coverage of 2,000 head per crop year (July 1 to June 30).

As cow-calf producers across the country gear up to sell calves, there’s an option available to cover their bottom line: price protection insurance. Known as Livestock Risk Protection (LRP), this insurance is designed to protect against declining prices.

Randy Buchholz with Heartland State Bank in Tulare, SD, explains that LRPs provide a price floor that can take advantage of higher prices in regard to a given date and time.

“It’s an alternative to futures for farmers to put a floor price under their cattle with the top side open,” Buchholz explains. “The key word is ‘alternative’ because there are other options.”

The other options he’s addressing is utilizing option puts or market futures. Though LRPs work similarly, many cattle producers are not comfortable playing the game of risk and paying for margin calls.

LRPs offer a variety of coverage types, levels and length of contracts which vary daily based off of trading in the futures market. It covers more than just calves, too. LRPs are available for feeder cattle, fed cattle, sheep and hogs. For the purposes of this article, we’ll focus solely on feeder cattle LRPs.

Coverage is available from 13 to 52 weeks prior to the anticipated market date and is available in 37 states, among them: North and South Dakota, Nebraska, Montana and Wyoming. Feeder cattle LRPs offer two different weight classifications: weight class 1, which covers calves under 600 lbs. (calves still on mama cows); and weight class 2, which covers calves 600-900 lbs. (backgrounded calves).

Here’s how it works. Coverage prices, rates, actual ending values and per hundredweight (cwt.) cost of insurance is updated daily on USDA’s Risk Management Agency (RMA) Web site (www3.rma.usda.gov/apps/livestock_reports). Ending values are based off of the Chicago Mercantile Exchange (CME) Group feeder cattle index.

At the end of August, a 13-week LRP policy had an expected ending value of $127/cwt., set to expire on November 30. Coverage is available at different levels ranging from 70 to 100 percent. With a 99 percent coverage level, it would cost producers $3.81/cwt. to insure feeder steers, weight class 1, get at least $126.04/cwt. The same scenario with a 96 percent coverage level would cost $2.12/cwt. for an expected ending value of $121.64/cwt.; or 87 percent coverage level for $0.49/cwt. locks you in at $110.64/cwt.

South Dakota State University professor of Animal Science Kelly Bruns breaks it down further. Suppose a producer wants to protect their calves for at least $116/cwt. For a 99 percent coverage level at that price, it would cost producers roughly 3 cents per pound, or $3/cwt. To determine the cost of the LRP, producers multiply the “cost per cwt.” by the classification of cattle, such as 700 lbs. “Essentially it will cost you $24 to have an LRP on that animal at a base price of $116/cwt.,” Bruns says.

As you can see, LRPs aren’t free – just like any type of insurance. Regardless of what the market does in terms of actual end market price, producers must pay the premium up front. And premiums increase as the coverage level increases.

“You have to make an investment to get that,” Bruns says. “And that investment may result in payment, if prices go down with the season decrease in the price of calves from August to December.”

Suppose on Nov. 30, the actual market end value was $122/cwt. Producers with the 99 percent coverage level LRP insurance above would be paid the difference of their coverage level ($126.04/cwt.) and actual market end value ($122/cwt.). Conversely, if the actual market end value is higher than the protection level, producers are only out their LRP premium and can take advantage of higher prices.

Producers should note that the actual end value is based off of a 5-day, 12-state average, in the cash market, which can work in favor of producers in the Midwest where feeder cattle prices are generally higher.

What’s appealing about LRPs is there is no minimum number of head required for protection, unlike put options, which generally are higher volume load-lots. For feeder cattle coverage, producers can cover up to 1,000 head of cattle, with a maximum annual coverage of 2,000 head per crop year (July 1 to June 30).

As cow-calf producers across the country gear up to sell calves, there’s an option available to cover their bottom line: price protection insurance. Known as Livestock Risk Protection (LRP), this insurance is designed to protect against declining prices.

Randy Buchholz with Heartland State Bank in Tulare, SD, explains that LRPs provide a price floor that can take advantage of higher prices in regard to a given date and time.

“It’s an alternative to futures for farmers to put a floor price under their cattle with the top side open,” Buchholz explains. “The key word is ‘alternative’ because there are other options.”

The other options he’s addressing is utilizing option puts or market futures. Though LRPs work similarly, many cattle producers are not comfortable playing the game of risk and paying for margin calls.

LRPs offer a variety of coverage types, levels and length of contracts which vary daily based off of trading in the futures market. It covers more than just calves, too. LRPs are available for feeder cattle, fed cattle, sheep and hogs. For the purposes of this article, we’ll focus solely on feeder cattle LRPs.

Coverage is available from 13 to 52 weeks prior to the anticipated market date and is available in 37 states, among them: North and South Dakota, Nebraska, Montana and Wyoming. Feeder cattle LRPs offer two different weight classifications: weight class 1, which covers calves under 600 lbs. (calves still on mama cows); and weight class 2, which covers calves 600-900 lbs. (backgrounded calves).

Here’s how it works. Coverage prices, rates, actual ending values and per hundredweight (cwt.) cost of insurance is updated daily on USDA’s Risk Management Agency (RMA) Web site (www3.rma.usda.gov/apps/livestock_reports). Ending values are based off of the Chicago Mercantile Exchange (CME) Group feeder cattle index.

At the end of August, a 13-week LRP policy had an expected ending value of $127/cwt., set to expire on November 30. Coverage is available at different levels ranging from 70 to 100 percent. With a 99 percent coverage level, it would cost producers $3.81/cwt. to insure feeder steers, weight class 1, get at least $126.04/cwt. The same scenario with a 96 percent coverage level would cost $2.12/cwt. for an expected ending value of $121.64/cwt.; or 87 percent coverage level for $0.49/cwt. locks you in at $110.64/cwt.

South Dakota State University professor of Animal Science Kelly Bruns breaks it down further. Suppose a producer wants to protect their calves for at least $116/cwt. For a 99 percent coverage level at that price, it would cost producers roughly 3 cents per pound, or $3/cwt. To determine the cost of the LRP, producers multiply the “cost per cwt.” by the classification of cattle, such as 700 lbs. “Essentially it will cost you $24 to have an LRP on that animal at a base price of $116/cwt.,” Bruns says.

As you can see, LRPs aren’t free – just like any type of insurance. Regardless of what the market does in terms of actual end market price, producers must pay the premium up front. And premiums increase as the coverage level increases.

“You have to make an investment to get that,” Bruns says. “And that investment may result in payment, if prices go down with the season decrease in the price of calves from August to December.”

Suppose on Nov. 30, the actual market end value was $122/cwt. Producers with the 99 percent coverage level LRP insurance above would be paid the difference of their coverage level ($126.04/cwt.) and actual market end value ($122/cwt.). Conversely, if the actual market end value is higher than the protection level, producers are only out their LRP premium and can take advantage of higher prices.

Producers should note that the actual end value is based off of a 5-day, 12-state average, in the cash market, which can work in favor of producers in the Midwest where feeder cattle prices are generally higher.

What’s appealing about LRPs is there is no minimum number of head required for protection, unlike put options, which generally are higher volume load-lots. For feeder cattle coverage, producers can cover up to 1,000 head of cattle, with a maximum annual coverage of 2,000 head per crop year (July 1 to June 30).

As cow-calf producers across the country gear up to sell calves, there’s an option available to cover their bottom line: price protection insurance. Known as Livestock Risk Protection (LRP), this insurance is designed to protect against declining prices.

Randy Buchholz with Heartland State Bank in Tulare, SD, explains that LRPs provide a price floor that can take advantage of higher prices in regard to a given date and time.

“It’s an alternative to futures for farmers to put a floor price under their cattle with the top side open,” Buchholz explains. “The key word is ‘alternative’ because there are other options.”

The other options he’s addressing is utilizing option puts or market futures. Though LRPs work similarly, many cattle producers are not comfortable playing the game of risk and paying for margin calls.

LRPs offer a variety of coverage types, levels and length of contracts which vary daily based off of trading in the futures market. It covers more than just calves, too. LRPs are available for feeder cattle, fed cattle, sheep and hogs. For the purposes of this article, we’ll focus solely on feeder cattle LRPs.

Coverage is available from 13 to 52 weeks prior to the anticipated market date and is available in 37 states, among them: North and South Dakota, Nebraska, Montana and Wyoming. Feeder cattle LRPs offer two different weight classifications: weight class 1, which covers calves under 600 lbs. (calves still on mama cows); and weight class 2, which covers calves 600-900 lbs. (backgrounded calves).

Here’s how it works. Coverage prices, rates, actual ending values and per hundredweight (cwt.) cost of insurance is updated daily on USDA’s Risk Management Agency (RMA) Web site (www3.rma.usda.gov/apps/livestock_reports). Ending values are based off of the Chicago Mercantile Exchange (CME) Group feeder cattle index.

At the end of August, a 13-week LRP policy had an expected ending value of $127/cwt., set to expire on November 30. Coverage is available at different levels ranging from 70 to 100 percent. With a 99 percent coverage level, it would cost producers $3.81/cwt. to insure feeder steers, weight class 1, get at least $126.04/cwt. The same scenario with a 96 percent coverage level would cost $2.12/cwt. for an expected ending value of $121.64/cwt.; or 87 percent coverage level for $0.49/cwt. locks you in at $110.64/cwt.

South Dakota State University professor of Animal Science Kelly Bruns breaks it down further. Suppose a producer wants to protect their calves for at least $116/cwt. For a 99 percent coverage level at that price, it would cost producers roughly 3 cents per pound, or $3/cwt. To determine the cost of the LRP, producers multiply the “cost per cwt.” by the classification of cattle, such as 700 lbs. “Essentially it will cost you $24 to have an LRP on that animal at a base price of $116/cwt.,” Bruns says.

As you can see, LRPs aren’t free – just like any type of insurance. Regardless of what the market does in terms of actual end market price, producers must pay the premium up front. And premiums increase as the coverage level increases.

“You have to make an investment to get that,” Bruns says. “And that investment may result in payment, if prices go down with the season decrease in the price of calves from August to December.”

Suppose on Nov. 30, the actual market end value was $122/cwt. Producers with the 99 percent coverage level LRP insurance above would be paid the difference of their coverage level ($126.04/cwt.) and actual market end value ($122/cwt.). Conversely, if the actual market end value is higher than the protection level, producers are only out their LRP premium and can take advantage of higher prices.

Producers should note that the actual end value is based off of a 5-day, 12-state average, in the cash market, which can work in favor of producers in the Midwest where feeder cattle prices are generally higher.

What’s appealing about LRPs is there is no minimum number of head required for protection, unlike put options, which generally are higher volume load-lots. For feeder cattle coverage, producers can cover up to 1,000 head of cattle, with a maximum annual coverage of 2,000 head per crop year (July 1 to June 30).

As cow-calf producers across the country gear up to sell calves, there’s an option available to cover their bottom line: price protection insurance. Known as Livestock Risk Protection (LRP), this insurance is designed to protect against declining prices.

Randy Buchholz with Heartland State Bank in Tulare, SD, explains that LRPs provide a price floor that can take advantage of higher prices in regard to a given date and time.

“It’s an alternative to futures for farmers to put a floor price under their cattle with the top side open,” Buchholz explains. “The key word is ‘alternative’ because there are other options.”

The other options he’s addressing is utilizing option puts or market futures. Though LRPs work similarly, many cattle producers are not comfortable playing the game of risk and paying for margin calls.

LRPs offer a variety of coverage types, levels and length of contracts which vary daily based off of trading in the futures market. It covers more than just calves, too. LRPs are available for feeder cattle, fed cattle, sheep and hogs. For the purposes of this article, we’ll focus solely on feeder cattle LRPs.

Coverage is available from 13 to 52 weeks prior to the anticipated market date and is available in 37 states, among them: North and South Dakota, Nebraska, Montana and Wyoming. Feeder cattle LRPs offer two different weight classifications: weight class 1, which covers calves under 600 lbs. (calves still on mama cows); and weight class 2, which covers calves 600-900 lbs. (backgrounded calves).

Here’s how it works. Coverage prices, rates, actual ending values and per hundredweight (cwt.) cost of insurance is updated daily on USDA’s Risk Management Agency (RMA) Web site (www3.rma.usda.gov/apps/livestock_reports). Ending values are based off of the Chicago Mercantile Exchange (CME) Group feeder cattle index.

At the end of August, a 13-week LRP policy had an expected ending value of $127/cwt., set to expire on November 30. Coverage is available at different levels ranging from 70 to 100 percent. With a 99 percent coverage level, it would cost producers $3.81/cwt. to insure feeder steers, weight class 1, get at least $126.04/cwt. The same scenario with a 96 percent coverage level would cost $2.12/cwt. for an expected ending value of $121.64/cwt.; or 87 percent coverage level for $0.49/cwt. locks you in at $110.64/cwt.

South Dakota State University professor of Animal Science Kelly Bruns breaks it down further. Suppose a producer wants to protect their calves for at least $116/cwt. For a 99 percent coverage level at that price, it would cost producers roughly 3 cents per pound, or $3/cwt. To determine the cost of the LRP, producers multiply the “cost per cwt.” by the classification of cattle, such as 700 lbs. “Essentially it will cost you $24 to have an LRP on that animal at a base price of $116/cwt.,” Bruns says.

As you can see, LRPs aren’t free – just like any type of insurance. Regardless of what the market does in terms of actual end market price, producers must pay the premium up front. And premiums increase as the coverage level increases.

“You have to make an investment to get that,” Bruns says. “And that investment may result in payment, if prices go down with the season decrease in the price of calves from August to December.”

Suppose on Nov. 30, the actual market end value was $122/cwt. Producers with the 99 percent coverage level LRP insurance above would be paid the difference of their coverage level ($126.04/cwt.) and actual market end value ($122/cwt.). Conversely, if the actual market end value is higher than the protection level, producers are only out their LRP premium and can take advantage of higher prices.

Producers should note that the actual end value is based off of a 5-day, 12-state average, in the cash market, which can work in favor of producers in the Midwest where feeder cattle prices are generally higher.

What’s appealing about LRPs is there is no minimum number of head required for protection, unlike put options, which generally are higher volume load-lots. For feeder cattle coverage, producers can cover up to 1,000 head of cattle, with a maximum annual coverage of 2,000 head per crop year (July 1 to June 30).

editor’s note: interested producers can get started with lrps by submitting a one-time application to rma. visit http://www.rma.usda.gov/livestock to learn more.

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