Bachand locks in calf prices with LRP
Doug Bachand, Edgemont, S.D., has found a way to lock in higher prices for his calves when he sells them in the fall. For the past two years, Bachand has used Livestock Risk Protection, or LRP, insurance — a program available for feeder cattle and fed cattle that allows producers to limit downside price risk while still being able to take advantage of higher prices.
Bachand buys LRP contracts when the feeder market is up in the summertime. He sets the contract to mature in October, when he usually sells his steer calves.
• Livestock Risk Protection insurance can help lock in calf profits.
• Cover as many head — or as few — as you wish with LRP insurance.
• The federal government pays 13% of the LRP insurance premium.
In October, when he sells his calves, if the current live feeder-cattle index is lower than the contract price he locked in — as it has been the last two years — Bachand receives a payment for the price difference.
In 2010 and 2011, Bachand netted an extra $23 per head for his calves using LRP contracts.
LRP has “worked well to get those higher prices,” says Bachand, who plans to watch LRP contracts again this summer for an opportunity lock a price.
Melissa Stearns, also of Edgemont, is a crop insurance agent licensed to offer LRP to cattle producers in South Dakota, Nebraska and Wyoming. She says LRP is very similar to a put option on the futures market, with one distinct advantage: You can insure as few head as you wish. With a feeder-cattle put option, you are required to buy put options in 50,000-pound increments.
Stearns expects that as price volatility continues, interest in LRP coverage will continue to grow.
“I’m seeing more bankers recommend to cattle owners that they need to do something to protect themselves from the price risk in the market. The LRP insurance program is a relatively easy way to do that without the use of the futures market,” she says.
LRP insurance is presently available for fed cattle (1,000 to 1,400 pounds), feeder cattle (steers and heifers up to 900 pounds) lambs and swine. All livestock must be owned by the individual or entity insuring the livestock at the time the insurance is purchased.
If you chose to purchase LRP insurance on a group of feeder calves, an expected ending value is estimated at the time the insurance is purchased.
This expected value is the current futures price of the cattle for the month in which they will be sold. Producers then choose which level of coverage they desire. This level can be between 70% and 100% of the expected ending value. The premium is then calculated based upon the level of coverage chosen.
Once the insurance period is over, the coverage price chosen by a producer at the beginning of the contract is compared to the actual ending value. This value is a seven-day rolling national average for 700- to 849-pound, medium or medium-large No. 1 framed steers.
If the actual ending value is larger than the coverage price, then no indemnity will be paid to the producer. The loss to the producer is the premium paid.
If the actual ending value is less than the coverage price, then an indemnity is paid which is simply the coverage price minus the actual ending value.
If the indemnity is collected, the gain from the LRP insurance is the indemnity minus the premium paid.
Stearns notes that LRP does have a notable cost. “The premiums are there,” she says, but adds, “It’s a product worth looking at, especially when the cattle market has shown such volatility these past few years.”
And presently, the premium is subsidized 13% by the federal government because it is trying to create more awareness and participation in this pilot program. Unlike most crop insurance products, the premium is due at the time of signing the LRP application.
The “target weight” for livestock need only be an estimate at the time of purchasing the insurance, and there are no negative impacts if the actual ending weight is higher or lower. The target weight will be the weight the loss check is based from.
For instance, if a target weight of 580 pounds is estimated, but the actual weight is 600 pounds, an insurance loss would be paid on 580 pounds.
Gordon writes from Whitewood, S.D.
This article published in the March, 2012 edition of DAKOTA FARMER.