Rural scenes in Burleson and Washington counties on April 7, 2021. (Laura McKenzie/Texas A&M AgriLife Marketing and Communications)
Ranchers face many risks associated with cattle marketing as we have seen last year with the pandemic. Any good marketing plan requires the knowledge of the available tools in the market that we can used. Each of these tools have their own advantages and disadvantages, and it is important to know them as well as their impact in our operation before making any decision. Today, in his first article as a new author for the Amarillo AgEcon Blog, Pancho Abello, AgriLife Extension Economist for District 3, reviews the Livestock Risk Protection Program.
Dates and Deadlines
9/9/2021 – Caprock Beef Conference; Plainview, TX
9/9/2021 – WASDE, USDA
9/20/2021 & 9/27/2021 – Five-State Beef Conference; Clayton, NM & Perryton, TX
9/24/2021 – Cattle on Feed
What I’m Reading
‘The Worst Thing I Can Ever Remember’: How Drought Is Crushing Ranchers – The New York Times
Livestock owners must register their brands after Aug. 31 – AgriLife Today
USDA Shares Farm Income Forecasts – Feedstuffs Daily
As we wrap up the summer and head back in to a season of decision-making, the Amarillo AgEcon Blog is welcoming a second author, Pancho Abello. Abello, a native of Argentina, is joining the blog after years of agricultural and livestock production experience. His professional background includes consulting, extension service, financial, economic and agribusiness analyses, strategic planning for commercial farming and ranching operations, and agricultural investment funds. Before joining AgriLife in 2020, Pancho worked on a 17,000-acre farm and ranch operation in Argentina, which includes a cow/calf program as well as grow corn, wheat, sunflowers, soybeans and barley. Pancho is a veteran economist who brings a wealth of knowledge to the table and I’m excited he’s decided to join in and work on the blog. Today’s article is his first in which he reviews the use of the Livestock Risk Protection program as a marketing tool. You can reach Pancho at pancho.abello@ag.tamu.edu
Marketing Plan Tools – Livestock Risk Protection Feeder Cattle (LRP)
Any good marketing plan requires the knowledge of the available tools in the market that can be used. Each of these tools have their own advantages and disadvantages, and the correct timing to use them may vary. However, it is important to know them as well as their impact in our operation before making any decision.
The Livestock Risk Protection Feeder Cattle (LRP) program from the USDA could be used as one of these tools to be incorporated as a yearly plan to reduce price volatility. A short description of this program and a couple of examples can be found below.
Basically, LRP is an insurance to protect producers for calves’ and stockers’ prices going down. At the end of the determined period, indemnities are trigger when ending values are lower than the coverage price. LRP could be used to establish a floor price like buying a Put Option in the Chicago Mercantile Exchange (CME) market. Prices used in this program are based on the weighted average price from the CME Group Feeder Cattle Index.
During the summer of 2019, and winter of 2021, the USDA made a few changes in the program making it available for all states and counties, more affordable, and delaying the payment of the premium until the end of the endorsement period. Payments due at the end od the period is a cash-flow advantaged when compared to buying a Put Option at the futures market. Producer premiums subsidies increased up to the level shown in Table 1 resulting in a more competitive and affordable program for producers.
Table 1. LRP Feeder Cattle – Percentage Subsidy Levels
The LRP program is available for most ranchers since it does not require a minimum number of cattle to be insured meaning that small ranches with even one cow could make use of it. Most importantly, it can be used for both cow-calf and stockers operations. This program allows ranchers to protect prices for cattle under 600 Lbs as well as between 600 to 900 Lbs, which is interesting for cow-calf producers since there not many tools available for price coverage of calves under 600 Lb. The insurance period must coincide with the time that the cattle would normally be marketed. Ranchers can get price coverage for calves, steers, heifers, predominantly Brahman cattle, predominantly Dairy cattle, and even unborn calves (Table 2).
Table 2. Cattle Categories
Other characteristics of this program are that 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. A summary of the characteristics of this program can be found in the next table (Table 3).
Table 3. LRP Feeder Cattle – Summary Characteristics
Although, premiums for LRP are often cheaper when 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 do operating options at the future market.
The following table shows an example with different target prices and each premium cost for each producer (Table 4.). Given the time of the year we are it was assumed a cow-calf ranch with fall calving herd that weaned those calves during the month of May with an expected weight of 599 Lbs/head, located in Wilbarger County, Texas. These set of prices and premium costs were obtained using the USDA-RMA Cost Estimator tool (https://ewebapp.rma.usda.gov/apps/costestimator/) for September 3rd, 2021.
Table 4. Livestock Risk Protection, Weaned Steer (599 LB)*
At 100% coverage level, the highest target price offered in the program was of $187/ CWT with a premium cost of $7.01/CWT considering a endorsement length of 39 weeks since we are planning to sell those calves in May of 2022. The producer premium includes the subsidy of 35% of the total premium. Net coverage price for the producer at this level is of $179.99/CWT, at a cost of $7.01/CWT or $42/head. If at the end of the endorsement period prices fell below $187/CWT, an indemnity is trigger and paid to the producer. If prices are higher no indemnities get paid. The table showed different examples and strategies that this rancher could use to set a minimum price for their calves, and the cost associated for each percentage level of price coverage given at the same endorsement length.
The second example represent a rancher located in Potter County raising stocker steers on wheat which are going to be sold during the month of May 2022 (Table 5) weighing 800 Lbs/head and wanted to set a minimum price for those steers on September 2, 2021. The set of prices and premium costs were also obtained using the USDA-RMA Cost Estimator tool (https://ewebapp.rma.usda.gov/apps/costestimator/). For this scenario, Put Options prices were also obtained and compared to LRP premium costs (CME Group – Feeder Cattle Future and Options website https://www.cmegroup.com/markets/agriculture/livestock/feeder-cattle.html) for the same day.
Table 5. Livestock Risk Protection, Weaned Steer (800 LB)*
The maximum price offered to purchase a coverage for an 800 pounds steer was of $170/CWT. At that level the premium cost of purchasing the price insurance was of $6.38/CWT or $51/head considering a 39-week endorsement length. LRP premiums were approximately 10% lower than Put Options prices for each price level. Remember that LRP costs are paid at the end of the period while Put Options have to be the day are purchased. On the other hand, also remember that Put Options can be offset at any time until the expiration day if it is convenient.
Net coverage price for the producer at this level is of $163.63/CWT, at a cost of $6.38/CWT or $51/head. There are different price levels at lower costs in which the producer can buy the price insurance if it fits better their marketing plan, expectations, and considering their production costs.
Price fluctuations due to unforeseen events continually show the importance of having a well-founded marketing plan using the available tools in the market that better fit your operation. Livestock Risk Protection Feeder Cattle program from the USDA is one of these tools that has not been used much but should be considered in every marketing plan. This program can be incorporated in almost every cow-calf operation.
For more information on LRP-Feeder Cattle insurance program please visit USDA-RMA website (https://www.rma.usda.gov/Fact-Sheets/National-Fact-Sheets/Livestock-Risk-Protection-Feeder-Cattle), or contact an approved livestock agent and insurance companies (https://www.rma.usda.gov/en/Information-Tools/Agent-Locator-Page). You can estimate premiums costs using the USDA Cost Estimator aid https://ewebapp.rma.usda.gov/apps/costestimator/.