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Revenue Insurance for Livestock Producers

Revenue Insurance for Livestock Producers. Two insurance products are now available. Livestock Risk Protection (LRP) For hogs, fed cattle and feeder cattle In CO, IL, IN, IA, KS, MI, MN, MO, NE, NV, ND, OK, OH, SD, TX, UT, WV, WI, WY Livestock Gross Margin (LGM) For hogs, only

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Revenue Insurance for Livestock Producers

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  1. Revenue Insurance for Livestock Producers

  2. Two insurance products are now available • Livestock Risk Protection (LRP) • For hogs, fed cattle and feeder cattle • In CO, IL, IN, IA, KS, MI, MN, MO, NE, NV, ND, OK, OH, SD, TX, UT, WV, WI, WY • Livestock Gross Margin (LGM) • For hogs, only • Available in Iowa, only

  3. LGM and LRP • Regulated and re-insured by the Federal Crop Insurance Corporation • LRP has 13% premium subsidy • Both can be withdrawn in case of extraordinary market conditions

  4. Livestock Gross Margin • Guarantees a minimum return over feed costs (gross margin) • Gross margin is based on: • Price of lean hog futures contracts • Price of corn on the CBOT futures • Price of soybean meal on the CBOT • Fits producer who buys feed best

  5. Livestock Gross Margin • Classify hogs as feeder pig finishing, SEW finishing, or farrow to finish. • Project number to be marketed up to 6 months in advance. • Check guarantees available on www.rma.usda.gov/tools/

  6. Livestock Gross Margin • Can guarantee from 80 to 100% of the projected gross margin. • Each marketing month is a separate guarantee. • If the actual gross margin is less than the guarantee, the producer receives a payment.

  7. Livestock Gross Margin • LGM is sold only on the last business day of each month. • Sold from close of markets until 9:00 am the next working day. • Can be withdrawn in case of extraordinary market circumstances

  8. LGM Results for Farrow to Finish

  9. Livestock Risk Protection (LRP) • Based on the CME lean hog futures price, CME feeder cattle index, or 5-area slaughter cattle price. • 70% to 95% guarantees available. • Coverage is available for up to 26 weeks out for hogs and 52 for cattle.

  10. Livestock Risk Protection • Cattle price is adjusted for: • type: conventional, dairy, brahman • Sex: steers or heifers • projected selling weight (feeder cattle) • Quantity insured = no. of head x projected selling wt. x % ownership

  11. Livestock Risk Protection • Guarantees available are posted at: www.rma.usda.gov/tools/ • Posted after the CME closes each day until 9:00 am central time the next working day. • Assures that guarantees reflect the most recent market movements.

  12. LRP Guarantee Example • State: IOWA • Commodity: SWINE • Expected date of sale 17 weeks out • Expected ending value: $76.80 per cwt • Coverage price: $69.88 per cwt • Coverage level: 91 % • Cost per cwt: $2.443 • End date: 07/18/2005

  13. Livestock Risk Protection • If average of cash index price on last 2 days of coverage is below the guarantee, indemnity is paid. Coverage price: $69.88 Ending price: $65.00 Payment: $4.88 x head x cwt.

  14. Coverage Limits for LRP Per endorsementPer year • Swine: 10,000 hd. 32,000 hd. • Fdr cattle: 1,000 hd. 2,000 hd. • Fed cattle: 2,000 hd. 4,000 hd.

  15. Some Restrictions • Cannot have both LRP and LGM coverage on the same livestock. • Cannot have an offsetting position in the options market. • There is a maximum of total coverage allowed by FCIC.

  16. Who can benefit from LGM/LRP? • Producers who depend on the daily cash market or a formula related to it. • Producers with low cash reserves. • Smaller producers who do not have the volume to use futures contracts or put options. • Producers who prefer insurance to the futures market. No margin account.

  17. Role of Futures Prices • Determines guarantee levels that are available, and premiums • Futures markets already reflect price forecasts • Insurance protects against prices at sale time being lower than expected by some % (deductible)

  18. Some Risks Remain • LRP, LGM do not insure against production risks • Futures prices and cash index prices may differ from local cash prices • Selling numbers, weights and dates may differ from the guarantees

  19. Educational Efforts in Iowa • Extension Bulletin • Mass media • Producer meetings • Mostly in 2002-2003 • Iowa Farm Bureau took leadership • Spreadsheet decision aid

  20. For more information visit: www.rma.usda.gov www.extension.iastate.edu/agdm Decision file B1-50

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