Livestock Risk Protection insurance updated
USDA’s insurance products have proven successful for crop farmers, often providing a lifeline after natural disasters. Yet, for all its successes, there has never been a widely used product to help cattle producers manage price risk. That could be changing due to recent improvements to Livestock Risk Protection (LRP) plan of insurance.
On July 1 2019, USDA implemented significant improvements to LRP and has recently announced that additional improvements will be effective on July 1st of this year. Changes that have and will soon take place include:
• Affordability: Reducing cost by increasing the premium discount from 13-25% for the highest levels of coverage and even higher for coverages with over a 5% deductible;
• Delayed Premium: Allowing premium to be paid after the insurance coverage ends; and
• Head Limits: A year ago the maximum number of insurable cattle was increased from 2,000 to 6,000 head.
Together these changes make LRP significantly more appealing to producers. While premiums still need to be reduced, it’s important to note that today’s LRP isn’t the LRP of old.
Additional Potential Changes
In August USDA’s Federal Crop Insurance Board of Directors will once again consider further improvements to LRP. When determining whether to make changes to an insurance program, producer support is one of the key criteria that is considered.
Cattle producers who are interested in improved risk management options should email Applied Analytics (contact information at bottom) or myself to learn about efforts underway to continue to improve LRP and to offer further suggestions. If approved, these changes will provide cattle producers an affordable tool so they can better protect themselves in today’s volatile markets.
What is LRP?
LRP protects producers from unexpected price declines. It allows producers to insure their cattle based upon expected market prices and protects them if prices fall unexpectedly.
LRP allows producers to insure between 70% and 100% of the projected price of their cattle. The projected price is based upon feeder cattle or live cattle futures prices and may vary depending upon the type of cattle (e.g., steers or heifers) and the weight of the cattle. The insurance coverage can be matched to the time that the cattle would typically be sold. LRP provides coverage for cow/calf, stocker, and feedlot operations. LRP has been available since 2003, but participation remained low due to perceived cost and other issues such as lack of options to insure further ahead than a few months. In layman’s terms LRP is a partially subsidized insurance product that allows a cattle owner to insure his cattle for some of all of the predicted futures (based on the CME) value of those cattle.
Brandon Willis points out that most cattle owners desire full or nearly full coverage because the futures market rarely diverges over 10 percent from the expected value.
Coverage level Current Premium Discount Premium Discount After 7/1/2020
95-100% 20% 25%
90-94.99% 25% 30%
80-89.99% 30% 35%
70-79.99% 35% 35%
In this example a producer has 100 calves and wants to protect against declining prices between July 1st and fall. When the calves are sold in mid-October they should weigh 550 pounds.
This producer could purchase a 17-week LRP endorsement on July 1 that ends on October 14th, effectively protecting against unexpected price declines during that 17 weeks.
On July 1st if the expected end value $150 per cwt. Think of the expected end value as the expected national price in October based upon the feeder cattle futures. If the producer chooses to purchase 98.67% coverage of the expected end value, the producer is effectively insuring at $148 per cwt, (you may think of this as a floor price). Fast forward until October 14th and the and the 12-state established price for calves based upon the feeder cattle index is $133 per cwt (established by feeder cattle index), or $15 per cwt less than the expected end value. The producer would receive and indemnity of the $15 per cwt. Below outlines the calculations for LRP under this example. Note that LRP is based upon national values so the actual amount a producer receives upon selling isn’t included in or taken into consideration for any LRP calculation.
Established at Sign Up
Expected Ending Value: $150.00 per cwt
Coverage Level: 98.67%
Coverage Price: $148.00 per cwt
Premium (Producer Cost): $4.50 per cwt or $2,475 total premium (4.5 per cwt x 5.5 cwt x 100 calves)
Determined After Insurance Coverage Ends
Actual Ending Value: $135.00 per cwt
LRP Indemnity (LRP payment to producer):
$148 (coverage price) – $133 (actual ending value)= $15 Indemnity per cwt
$15 per cwt x 5.50 cwt x 100 head = $8,250 Indemnity to producer
From 2013-2017, Brandon Willis oversaw USDA’s insurance programs as the Administrator of the Risk Management Agency. Before that, he served as a Senior Advisor to U.S. Secretary of Agriculture Tom Vilsack. He owns Ranchers Insurance LLC, an insurance agency that sells LRP. He can be reached at email@example.com.
To learn more about potential LRP changes or to suggest improvements contact Peter Griffin the developer of LRP at Petegr@apldag.com
–This news release from Ranchers Insurance owned by Brandon Willis and was edited to include additional details
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