Ranchers face many price risks associated with cattle marketing, as we saw these last years. USDA changes in LRP made this tool more appealing to ranchers that want to reduce price risk.
Dates & Deadlines
9/12/2022 – Hemphill County Mini Ag Conference, Canadian
9/15/2022 – Caprock Cattle Conference, Muncy
What We’re Reading
What’s driving high fertilizer prices – Southwest Farm Press
Resources available for rural mental health assistance – Southwest Farm Press
Producer Owned Beef announces $670 million facility in Amarillo – Amarillo Globe News
Inflation Reduction Act passes with ag climate investments – Southwest Farm Press
Proposed Sustainability Disclosure Rules Draw Comments and Concerns – The Wall Street Journal
Price Risk Management Tool for Stockers Cattle – LRP
Soon, many of us may begin to analyze buying stockers to sell them back in March or May with a heavier weight. In addition to this year’s unusual weather and production costs, we must incorporate a price risk management tool into our plans.
Price fluctuations due to market disruptions or weather events continually show the importance of having a well-founded marketing strategy using the available tools in the market. The Livestock Risk Protection Feeder Cattle program from the USDA is one of the tools that has become more popular these last years. Every marketing plan must consider the use of this tool.
A good marketing plan requires knowledge of the available tools in the market. Each tool (LRP, Put, or Futures) has advantages and disadvantages, and the correct timing to use them may vary. However, it is important to know their impact on our operation well before making any decision.
Basically, The USDA Livestock Risk Protection Feeder Cattle (LRP) program is used to reduce price risk in our operations by setting a floor price for our cattle and locking margins. At the end of the determined period, indemnities are triggered when ending values are lower than the cover price. LRP could be used to establish a floor price like buying a Put Option in the CME market. Almost every cow-calf or stocker operation can incorporate LRP.
Key Characteristics of LRP
During the summer of 2019 and winter of 2021, the USDA made a few changes to the program. These modifications reduced the premium paid by producers, delayed the premium payment to the end of the endorsement period, and made it available in all states and counties (Table 1). Payments due at the end of the period are a cash-flow advantage compared to buying a Put Option in the futures market.
Table 1. LRP Key Characteristics
Producer premiums subsidies increased to the level shown in Table 2, resulting in a more competitive and affordable program for producers.
Table 2. LRP Premiums Subsidy
Although premiums for LRP are often cheaper compared to Put Options due to the level of subsidy, premium costs depend on the expected end price, the coverage level, and the endorsement length. One of the disadvantages of operating with LRP is that once you purchase the insurance, there is no option to offset that position at any time, as we might be used to operating options in the future market.
The program is available for most ranchers since it does not require a minimum number of cattle. Small ranchers with even one cow could make use of it. Most importantly, cow-calf and stockers operations can benefit from this program since it allows ranchers to protect prices for cattle under 600 Lbs. and between 600 to 900 Lbs.
Producers can cover price levels ranging between 70 to 100% of the expected price with an available endorsement length up to 13, 17, 21, 26, 30, 34, 39, 43, 47, or 52 weeks.
May 2023 Stockers Example
The following table shows the cost of purchasing LRP for stockers that a rancher is planning to sell in May 2023, with 800 Lbs./head of weight (Table 3). Producer’s premium and price insurance were estimated using the USDA-RMA Cost Estimator tool (https://ewebapp.rma.usda.gov/apps/costestimator/).
Table 3. LRP Example for May 2023 Stockers
At a 100% coverage level, the program’s target price was $194/ CWT, with a net producer’s premium after the subsidy of $7.13/CWT. If the USDA reported prices fell below $194/CWT at the end of the endorsement period, an indemnity is triggered and paid to the producer. If prices are higher, no indemnities are paid.
The value for a Put option for a similar price was 8.98 $/CWT, around 25.9% more expensive (https://www.cmegroup.com/markets/agriculture/livestock/feeder-cattle.html). Remember that both tools have pros and cons and have to be analyzed before.
More Information on LRP
For more information and further details on LRP, please check the USDA Fact Sheet (Livestock Risk Protection Fed Cattle | RMA (usda.gov)). The USDA website lists approved livestock agents and insurance companies if you are interested in buying the insurance.