“Expect the best. Prepare for the worst. Capitalize on what comes.” This is but one of the many pieces of sage advice shared by author and motivational speaker, Zig Ziglar, with his audiences and readers over the course of his distinguished career.
On the forefront of what farmers might expect, prepare for, and capitalize on is the price they will receive for the livestock they raise and sell. A common practice employed by farmers to prepare for declining livestock prices is to buy and sell financial instruments called “derivatives,” such as futures contracts and options. While participating in the derivatives market may be an acceptable risk-management tool for some, there are several downsides as well, including the possibility of margin calls.
The U.S. Department of Agriculture (USDA) offers farmers an alternative to trading in derivatives through its Livestock Risk Protection (LRP) insurance program. This article summarizes what LRP insurance is, how it may be obtained, and some of its benefits and drawbacks that livestock farmers may want to consider before deciding to purchase coverage.
What is LRP Insurance?
LRP insurance is a federally sponsored program available for farmers who raise and sell swine, fed cattle, and feeder cattle. It is designed to protect against declining market prices for periods when producers typically sell market weight livestock. Policies range from seventy percent (70%) to one hundred percent (100%) of the expected value of the covered animal at the end of the insured period. Plans are available throughout the year with endorsements covering spans of 13, 17, 21, 26, 30, 34, 39, 43, 47, or 52 weeks, which may be limited based on insured type. When the actual ending value falls below the coverage price, the policy pays out the difference between these two values.1
While perhaps obvious to some, farmers must be aware that LRP insurance protects against declining market prices only. LRP insurance does not cover other causes of loss, such as mortality, disease, or physical damage to livestock. While there may be other insurance available to protect against such losses, farmers should not rely on LRP insurance for this purpose.
What is the Process of Obtaining LRP Insurance?
To receive coverage for LRP insurance, a farmer must first seek out a Risk Management Agency (RMA)-approved livestock insurance agent.2 Producers must then submit a one-time application for the type of coverage they desire, whether that be swine, fed cattle, or feeder cattle. After the application is accepted by the RMA, a producer may then buy specific coverage endorsements throughout the year, up to the following amounts:
- Feeder Cattle (expected weight up to 1,000 pounds): 12,000 head per endorsement; 25,000 head annually.3
- Fed Cattle (weighing between 1,000 and 1,600 pounds): 12,000 head per endorsement; 25,000 head annually.
- Swine: 70,000 head per endorsement; 750,000 head annually.
LRP insurance for feeder cattle,4 fed cattle,5 and swine6 is available in all counties in all states within the U.S. Feeder cattle plans also provide two weight ranges: 100-599 pounds (Weight 1), and 600-1,000 pounds (Weight 2).
While you may fill out an application for LRP insurance at any time, the insurance does not attach until you purchase a specific coverage endorsement. A single application can cover multiple coverage endorsements. However, protection does not start until the day you buy coverage, and the RMA approves the purchase.
What are the Benefits of LRP Insurance?
A main benefit of LRP insurance is that it limits the risk of market declines while still allowing a farmer to benefit from potential price increases. For instance, assume a Minnesota farmer producing feeder cattle took out a thirteen (13) week policy on August 5, 2022, for steers weighing between 100-599 pounds (Weight 1, explained above) at a coverage level of 99.1%. The coverage price for that cattle was set at $203.87, while the actual end value of the cattle was only $194.60.7 The farmer who took out the policy would have received a $9.27 per hundredweight (cwt) payment under the policy.8 If in this same example the markets had improved and the end value exceeded the coverage price of $203.87, the farmer would not have received any insurance payment. But the farmer would still be able to receive the benefits of increased prices for the cattle he ultimately sold. Moreover, unlike certain derivatives instruments, the farmer would not have the added burden of paying unpredictable margin calls on its short positions. The premium the farmer paid for the coverage is a definite, fixed amount, thereby allowing the farmer to more easily predict and manage his cash-flow for the duration of the policy.
LRP insurance also affords producers a significant degree of flexibility to tailor coverage and manage risk to their particular operation and needs. There is no minimum head count. A farmer could literally insure a single animal. Farmers with varying numbers of livestock, thus, all stand to benefit from LRP insurance. Further, because insurance may be purchased for 10 different coverage periods spanning from 13 weeks to 52 weeks on almost any given weekday, farmers can choose a coverage period based on the particular circumstances and risks their operation is facing at different points in time during the year.
What are the Drawbacks of LRP Insurance?
One obvious drawback of LRP insurance is that obtaining coverage is not free. Producers must pay a premium in order to obtain coverage. The amount of the premium is expressed on a per hundredweight (cwt) basis and is a function of the coverage level, endorsement length, and date of purchase. As might be expected, the premium increases as the coverage level increases. However, a portion of the premium is subsidized by the USDA. The amount by which the USDA will subsidize premiums has increased in recent years, which has made LRP insurance a more attractive option.
LRP insurance also has potential traps for the unwary. For example, if a farmer sells covered livestock more than sixty (60) days before the end of the coverage end date, the farmer risks forfeiting any insurance indemnity payment despite having to pay the entire insurance premium. Other events that could cause a loss or adjustment in the amount of insurance payment include failing to meet minimum targets weights at the coverage end date or failing to provide ownership records for covered livestock.9
Conclusion.
As set forth above, LRP insurance has attributes that may make it a more attractive alternative to certain livestock farmers when compared to derivatives-based risk management options. Coverage comes at a cost, however, and failure to adhere to the conditions to obtaining and maintaining LRP insurance could cause a loss or reduction in coverage. Farmers considering LRP insurance should discuss plan options with an RMA-approved insurance agent to determine whether there is a plan that suits their needs.
1 Actual ending value is based on the weighted prices from the U.S. Dep. of Agriculture’s Agricultural Marketing Service. See Livestock Reports, U.S. Dep. of Agriculture Risk Management Agency, available at https://www.rma.usda.gov/Information-Tools/Livestock-Reports (last visited Aug. 7, 2023).
2 See Agent Locator, U.S. Dep. of Agriculture Risk Management Agency, available at https://www.rma.usda.gov/en/Fact-Sheets/National-Fact-Sheets/Livestock-Risk-Protection-Swine (last visited Aug. 7, 2023).
3 It should be noted that each LRP insurance year runs from July 1 of a calendar year to June 30 of the following calendar year.
4 See Livestock Risk Protection Feeder Cattle, Risk Management Agency Fact Sheet, available at https://www.rma.usda.gov/Fact-Sheets/National-Fact-Sheets/Livestock-Risk-Protection-Feeder-Cattle (last visited Aug. 7, 2023).
5 See Livestock Risk Protection Fed Cattle, Risk Management Agency Fact Sheet, available at https://www.rma.usda.gov/Fact-Sheets/National-Fact-Sheets/Livestock-Risk-Protection-Fed-Cattle (last visited Aug. 7, 2023).
6 See Livestock Risk Protection Swine, Risk Management Agency Fact Sheet, available at https://www.rma.usda.gov/en/Fact-Sheets/National-Fact-Sheets/Livestock-Risk-Protection-Swine (last visited Aug. 7, 2023).
See LRP Coverage Prices, Rates, and Actual Ending Values – Report for 08/05/2022, available at https://public.rma.usda.gov/livestockreports/ LRPReport.aspx (last visited Aug. 7, 2023).
8 The farmer’s total payment would depend on the total pounds for which he sought coverage Thus, if the farmer obtained coverage for 10,000 pounds of cattle, the $9.27 per hundredweight (cwt) difference between the coverage price and the actual end value would result in the farmer receiving total insurance proceeds in the amount $927.
9 See United States Department of Agriculture, Livestock Risk Protection (LRP) Insurance Standards Handbook, 2023 and Succeeding Crop Years, at pp. 6-7, available at: https://www.rma.usda.gov/-/media/RMA/Handbooks/Privately-Developed-Products—20000/Livestock-Risk-Protection/2023-20010-Livestock-Risk-Protection.ashx?la=en.
