{"id":3187,"date":"2023-11-10T10:10:01","date_gmt":"2023-11-10T16:10:01","guid":{"rendered":"https:\/\/agrilife.org\/agecon\/?p=3187"},"modified":"2023-11-10T10:10:01","modified_gmt":"2023-11-10T16:10:01","slug":"high-plains-ag-week-11-10-2023-lrp-decision-making","status":"publish","type":"post","link":"https:\/\/agrilife.org\/agecon\/high-plains-ag-week-11-10-2023-lrp-decision-making\/","title":{"rendered":"High Plains Ag Week 11\/10\/2023 \u2013 LRP Decision Making"},"content":{"rendered":"
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(Laura McKenzie\/Texas A&M AgriLife Marketing and Communications)<\/p><\/div>\n

The USDA\u2019s Livestock Risk Protection (LRP) program is a useful tool to help producers manage price risk.\u00a0 In this post, we will explain what LRP does and how it works, and we will discuss two important decisions that producers who wish to use this tool must make. \ufffc<\/p>\n

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Board Update 11\/6<\/strong><\/span>\/2023\"\"<\/strong><\/span><\/h3>\n

Tulia, Amarillo, Dalhart Average – Cattle Prices by Category !1\/3\/2023\"\"<\/strong><\/h3>\n

What is LRP?<\/h2>\n

Livestock Risk Protection (LRP) is a price risk management tool that is available year-round for producers of fed cattle, feeder cattle, and swine through USDA\u2019s Risk Management Agency (RMA).\u00a0 LRP protects producers against declines in regional or national market prices.\u00a0 This means that LRP does not establish a guaranteed cash price for a producer\u2019s livestock.\u00a0 Instead, LRP guarantees a payment when a regional or national price index, essentially an average cash price for a region on a specific date, falls below the coverage price in the policy.\u00a0 The payment received by the producer makes up the difference in the coverage price and the index price.\u00a0 To put this another way, LRP would not protect a producer from local price declines but will protect against price declines that affect the entire (regional or national) market, such as those caused by a major disease outbreak or weather event.<\/p>\n

How LRP Works<\/h3>\n

When a producer signs up for LRP, they decide on the length and level of coverage that they wish to purchase.\u00a0 The length of coverage for an LRP policy ranges from 13 to 52 weeks.\u00a0 The level of coverage ranges from 70% to 100% of the policy\u2019s expected ending value, which is the expected livestock price when the policy expires.\u00a0 This price is based on the nearby CME futures price to a policy\u2019s end date and changes daily based on movements in the futures price.\u00a0 LRP expected ending values, coverage prices and levels, and premium values are published daily on the RMA website.\u00a0 Figure 1 gives an example of this report for November 7, 2023.<\/p>\n

Figure 1. Example LRP Report<\/strong>\"\"<\/h4>\n

In Figure 1, we see four possible coverage levels for a 13-week policy on feeder cattle weighing between 600 and 1000 lbs. \u00a0The expected ending value for the policy is $231.662\/cwt, which is based on the price of a March 2024 feeder cattle futures contract.\u00a0 The four possible coverage levels shown in the figure are 99.46%, 98.60%, 97.73%, and 96.87%.<\/p>\n

If a producer chose the 98.6% coverage level, the row outlined in black in Figure 1, the LRP coverage price in their policy is $228.41\/cwt.\u00a0 That is:<\/p>\n

Coverage Level = Coverage Price <\/em>\u00f7 Exp. End Value =<\/em> $228.41 <\/em>\u00f7 $231.662 = 0.986.<\/em><\/p>\n

The coverage rate, which determines the cost per cwt for this level of coverage, is 2.86164%.\u00a0 Multiplying the coverage rate by the coverage price results in the policy\u2019s total cost per cwt:<\/p>\n

Cost per CWT = Coverage Price <\/em>\u00d7 Coverage Rate = $228.41 <\/em>\u00d7 0.0286164 = $6.433\/cwt.<\/em><\/p>\n

The premium paid by the producer for this policy is subsidized by the RMA.\u00a0 The subsidy rates paid by RMA for different levels of coverage are listed in Table 1 below.\u00a0 In this case, the coverage level is between 95% and 100% so 35% of the policy\u2019s cost is subsidized.\u00a0 The producer pays 65% of the policy\u2019s cost as a premium:<\/p>\n

Premium = (1 \u2013 Subsidy Rate) <\/em>\u00d7 Cost per CWT = 0.65 <\/em>\u00d7 $6.433 = $4.18\/cwt.<\/em><\/p>\n

If a producer owned 50 head of cattle which they planned to sell approximately 13 weeks from now at a weight of 7 cwt (700 lbs.), they would pay a total premium of about $1,463.\u00a0 That is:<\/p>\n

Total Premium = 50 <\/em>\u00d7 7 <\/em>\u00d7 $4.18 = $1,463<\/em>.<\/p>\n

Table 1. LRP Subsidy Rates\"\"<\/strong><\/h4>\n

If a producer purchases this policy, its end date is February 6.\u00a0 Based on that date, RMA determines the policy\u2019s actual ending value (the blank column in Figure 1) using an index for cash prices received, such as the CME feeder cattle index.\u00a0 If the actual ending value is greater than or equal to the policy\u2019s coverage price, no payment is made by the policy.\u00a0 If the actual ending value is less than the policy\u2019s coverage price, then the policy will pay the difference between the coverage price and the actual ending value.\u00a0 In this example, if the actual ending value for February 6 is $230\/cwt then no payment is made.\u00a0 On the other hand, if the actual ending value is $215\/cwt then the policy will pay an indemnity of $13.41 per cwt sold by the producer.\u00a0 That is:<\/p>\n

Indemnity per CWT = Coverage Price \u2013 Actual Ending Value = $228.41 \u2013 $215 = $13.41\/cwt.\u00a0 \u00a0<\/em><\/p>\n

Important LRP Decisions<\/h3>\n

When a producer applies for LRP, there are two important decisions that they must make.\u00a0 First, the producer must decide on the length of coverage that they wish to purchase.\u00a0 To make this decision, consider when you plan to sell the livestock.\u00a0 LRP requires that the person who applies for the policy must have an ownership stake in the livestock and must maintain ownership until at least 60 days prior to the sale of the livestock covered by the policy.\u00a0 For this reason, it\u2019s best to pick a coverage length that matches with when you plan to sell the livestock covered by the policy.\u00a0 Coverage lengths for LRP are 13, 17, 21, 26, 30, 34, 39, 43, 47, or 52 weeks.<\/p>\n

The second decision a producer must make is what coverage level to purchase.\u00a0 Coverage prices in LRP policies range from 70% – 100% of the expected ending value.\u00a0 Lower levels of coverage provide less protection against price declines but are subsidized at higher rates by RMA.\u00a0 As you choose your level of coverage, consider how much price risk you face, how comfortable you are with that risk, and how much coverage you can afford to purchase.<\/p>\n

Additional Information and Useful Links<\/h3>\n

To purchase LRP insurance, you must first fill out a one-time application to the program.\u00a0 Then you can purchase a specific policy from a private insurance agent.<\/p>\n

For more information on LRP, consider the following links:<\/p>\n