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ECON 337: Agricultural Marketing

ECON 337: Agricultural Marketing. Chad Hart Assistant Professor chart@iastate.edu 515-294-9911. Livestock Price Risk Tools. Livestock Futures and Options Livestock Revenue Insurance Livestock Revenue Protection (LRP) Livestock Gross Margin (LGM) http://www.rma.usda.gov/livestock/

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ECON 337: Agricultural Marketing

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  1. ECON 337: Agricultural Marketing Chad Hart Assistant Professor chart@iastate.edu 515-294-9911

  2. Livestock Price Risk Tools Livestock Futures and Options Livestock Revenue Insurance Livestock Revenue Protection (LRP) Livestock Gross Margin (LGM) http://www.rma.usda.gov/livestock/ Factsheets Premium calculator http://www.extension.iastate.edu/agdm/ldcostsreturns.html

  3. Livestock Risk Protection (LRP) Price risk insurance coverage for hogs, fed cattle, feeder cattle, and lamb Insurance protects against low livestock prices 70% to 100% guarantees available for cattle and hogs, based on CME futures prices

  4. Livestock Risk Protection Coverage is available for up to 26 weeks for hogs and 52 weeks for cattle Works sort of like a put option Premiums are subsidized, the government pays 13% of the premium

  5. Livestock Risk Protection Guarantees available are posted at: http://www3.rma.usda.gov/apps/livestock_reports/ 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

  6. LRP Example http://www.extension.iastate.edu/agdm/livestock/pdf/b1-50.pdf

  7. LRP vs. Futures/Options Futures and options have fixed contract sizes Hogs: 400 cwt. or about 150 head Fed cattle: 400 cwt. or about 32 head Feeder cattle: 500 cwt., 60-100 head LRP can be purchased for any number of head or weight

  8. LRP vs. Futures/Options Futures hedge or options can be offset at any time before the contract expires LRP can not be offset, once you buy the coverage, you’re locked in

  9. Livestock Gross Margin (LGM) Insures a “margin” between revenue and cost of major inputs for cattle, hogs, and dairy Protects against decreases in cattle/hog prices and/or increases in input costs Hogs Value of hog – corn and soybean meal costs Cattle Value of cattle – feeder cattle and corn costs We’ll talk about dairy later in the semester

  10. Livestock Gross Margin Cattle (coverage for up to a year out) Calves Yearlings Hogs (coverage for up to 6 months out) Farrow to finish Finishing feeder pig Finishing SEW pig

  11. LGM Guarantees for Hogs Farrow to Finish Gross margin per hogt = 2.6*0.74*Lean Hog Pricet - 12 bu. * Corn Pricet-3 - (138.55 lb./2000 lb.) * SoyMeal Pricet-3 Finishing Gross margin per hogt = 2.6*0.74*Lean Hog Pricet - 9 bu. * Corn Pricet-2 (82 lb./2000 lb.) * SoyMeal Pricet-2 SEW Gross margin per hogt = 2.6*0.74*Lean Hog Pricet – 9.05 bu. * Corn Pricet-2 (91 lb./2000 lb.) * SoyMeal Pricet-2

  12. LGM Guarantees for Cattle Yearlings Gross margin per headt = 12.5*Live Cattle Pricet – 7.5*Feeder Cattle Pricet-5 - 50 bu. * Corn Pricet-2 Calves Gross margin per headt = 11.5*Live Cattle Pricet – 5.5*Feeder Cattle Pricet-8 - 52 bu. * Corn Pricet-4

  13. Livestock Gross Margin Has deductibles, like car or home insurance For cattle, deductibles from $0 to $150 per head by $10 increments For hogs, deductibles from $0 to $20 per head by $2 increments

  14. LGM-Swine Farrow-to-Finish, Feb. 2012

  15. LGM Example Say we insure 100 hogs in April and choose a $2 deductible Our LGM policy is protecting us against gross margins below $76.74 per head When April comes, the insurance company will compute the actual margin using the same formula as was used for the guarantee

  16. LGM Example If the lean hog price fell to $88 per cwt., the corn price fell $6.00 per bu., and the soybean meal price stayed at $311.70 per ton, then the actual gross margin is Actual gross margin per hogt = 2.6*0.74*$88- 12 bu. * $6.00 - (138.55 lb./2000 lb.) * $311.70 = $75.72 per head Per head indemnity = $76.74 - $75.72 = $1.02

  17. LGM Issues Only available on the last business Friday of the month Is a complicated insurance policy Works like an Asian basket option Asian = uses a price average Basket = covers more than one commodity Like a put on cattle/hogs and calls on feeder cattle, corn, and soybean meal

  18. 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.

  19. Some Risks Remain LRP, LGM do not insure against production risks Futures prices and cash index prices may differ from local cash prices (basis risk) Selling weights and dates may differ from the guarantees

  20. Class web site: http://www.econ.iastate.edu/~chart/Classes/econ337/Spring2012/ Have a great weekend!

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