Livestock Risk Protection insurance may be a wise management decision
June 3, 2013
Burdell Johnson can't say enough good things about Livestock Risk Protection (LRP) insurance and the benefits it offers livestock producers.
Johnson, who operates a Food Fiber and Risk Managers (FFRM) agency in Tuttle, North Dakota, believes more livestock owners would benefit from the program if they were aware of the benefits it offers.
"Our agency, FFRM, was developed by the American Sheep Industry to help sheep owners protect their assets," Johnson said. "We specialize in selling LRP. We also sell insurance policies for cattle and swine."
LRP offers single-peril price risk protection to feeder and fed cattle producers and swine producers to help protect against declining cattle or swine prices. Premiums as low as $2 per hundredweight for lightweight calves pay livestock producers if the national or regional cash price index falls below the insured coverage price level.
"Essentially, with the coverage price selected by the livestock owner, if the cash price index for the insured cattle or hogs falls below that coverage price at the end of the policy term, the producer collects an indemnity equal to the difference," Johnson said. "Producers can follow daily LRP premiums and coverage prices on the USDA website. They're market-based so they change with each market report."
LRP beef premiums are subsidized at 13 percent and sheep premium subsidies vary by the Federal Government. An average premium for lightweight calves under 600 pounds would be $2 per hundredweight.
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"If that calf weighs 500 pounds, the premium is $10," Johnson said. "At the end of the contract term, if index prices have fallen below the guaranteed LRP price, producers receive the difference between the insured price and the market price. If the value per hundredweight is higher than what was insured, the livestock producer gains that extra profit. There's a myth that with LRP you have to sell calves at the end of the contract term, which is false. You can retain the cattle or sell them at the end of the contract, whatever you decide. You're not required to take them to market."
With high feed costs, livestock producers have an opportunity to use LRP to ensure recovery of feed costs in a specified time frame.
"Beef producers can insure as few as one animal or as many as 2,000 per year," Johnson said. "Sheep producers can insure up to 28,000 animals per year. The program is especially beneficial to young producers who can take some collateral to their banker."
To qualify for the program, producers must own their livestock when they enroll in the program and retain ownership of them for 30 days prior to expiration of the insurance contract.
"That keeps speculators out of LRP," Johnson explained. "There's a one-time application and to make changes to the premium and the locked-in price, producers simply call their agent. For beef producers, market reports come out at 4 p.m. and they have until 9 a.m. the next morning to make changes in their LRP program. After 9 a.m. they're subject to the market conditions reported again that afternoon."
To enroll, a producer must contact a licensed agent and provide general information such as address, phone number, Social Security number, and type of livestock to be insured. Applications are approved by USDA, giving livestock owners the right to purchase coverage without obligating them to make the purchase.
For feeder cattle, weight classes under 600 pounds and cattle between 600 and 900 pounds are eligible for LRP. Both steers, heifers and Brahman and dairy breeds are insurable. Bull calves of any breed expected to weigh less than 600 pounds can be insured.
Insurance periods are set by weeks, including 13, 17, 21, 26, 30, 34, 39, 43, 47 or 52 weeks. Coverage levels vary from 70 to 100 percent. The Chicago Mercantile Exchange (CME) Feeder Cattle Price Index is used to measure cash feeder cattle prices and then compared to the coverage price to determine whether an indemnity will be paid. For feeder heifers, lighter weight cattle, Brahman or dairy breeds, the same index is used as a base, with an adjustment factor.
"Some people are used to valuing their cattle by watching the futures market," Johnson said. "That's understandable. Right now, the October 29, contract is set at $1.67 per hundredweight. That's unheard of. If you pay the LRP premium now at that price, that's the price you'll receive with the policy once the contract ends."
Insurable fed cattle includes both steers and heifers expected to finish with a Select or higher quality grade, Yield Grade 1-3 and weigh between 1,000 and 1,400 pounds (lwb). Fed cattle producers are able to insure up to 4,000 animals per crop year.
"LRP is a lot like crop insurance," Johnson said. "Many beef producers just aren't very aware of the options it provides."
Johnson, who works with his wife and daughter to enroll livestock producers in the LRP program, notes that insurance agents don't earn a great deal through the LRP program, which can pose a challenge for producers who want to know more about the product.
"Livestock producers need help," Johnson said. "We have our own livestock and we were rescuing calves this week from the unusually cold temperatures here. This has been the most difficult calving season we've ever had."
Johnson travels to conventions across the United States and has talked in seven different countries about LRP. FFRM is licensed and offered in 28 U.S. states.
"It's not for everyone," Johnson admitted. "If you can shoulder the financial risk of producing livestock, this program won't help you. That's not the case for most livestock producers, however. Like any insurance plan, you get the coverage you pay for. With today's high input costs, it makes livestock production somewhat less of a risk.
"It doesn't eliminate all risk and doesn't cover sickness or death," Johnson added. "But it is a risk management option available to livestock producers."
More details about LRP are available at http://www.ianrpubs.unl.edu/pages/publicationD.jsp?publicationId=797. Details about FFRM are found at http://www.fafrm.com/index.html.