With the value of cattle continuing to rise, the amount of risk tied up in each animal in the pasture and the feedlot also increases. Risk management tools are available to producers to help mitigate the effects of the cattle cycle and volatility in the market.
Cash cattle prices have risen for the last seven weeks. The spread between futures and cash is really wide with multiple issues affecting the spread.
Fifth generation rancher, Jared Brackett, Filer, Idaho, runs a cow-calf and backgrounding operation with his family. Brackett began purchasing Livestock Risk Protection (LRP) on his cattle four years ago as it was cheaper and easier than using futures and options for hedging.
“I tell people we’re not trying to find the top of the market with price insurance, we’re trying to protect what you have,” Brackett says. “You don’t buy fire insurance for your house when it’s on fire. You buy it before, hoping you never have to use it. It’s the same concept with price insurance. You buy it hoping you have to pay your premium because then all your cattle are worth more.”
LRP is a government program subsidized through the Risk Management Agency. Brackett, who became licensed to sell LRP after using it and finding the benefits of it, explain it’s the same thing as using options, but costs 30% less and producers don’t have to set up a hedge account.
I pay a lot of money in premiums every year. But what it does is it gives me that peace of mind that if things fall apart, it’s not going to break me.
“It’s a very simple, easy program. It is true insurance,” he says. “The part that people have a hard time getting their arms wrapped around is the government doesn’t care what you sell your cattle for. All they care about is the day you buy your contract, what the futures price is that day, and what the futures price is the day your contract ends. That’s the part that gets people; they don’t understand that.”
What you need to know about LRP
There is a fed cattle option, which is anything more than 1,000 lb. and based off live cattle futures. The settlement price is based off the six-state average that USDA publishes. Producers have to show proof of ownership of cattle through purchase receipts, livestock vaccine receipts or a veterinarian certifying ownership.
“It’s not exactly a one-to-one like futures are for feeder cattle, but it’s still a good tool to protect your enterprise,” Brackett says. “You have to have sold your fat cattle they have to be dead within two months of your contract, either before or after.”
There are four options for feeder cattle including steers and heifers under 600 lb. and steers and heifers more than 600 lb. There are also options for unborn steers and heifers. Contracts are put on after hours.
“After the market closes, agents will get a report with the prices for the different contracts,” Brackett says. “Those prices are good until the next morning before the market opens. They quit taking contracts because the government has to turn around and buy these positions in the market to offset what you’re buying from them.”
Brackett recommends filling out an application early and working with a licensed crop insurance agent who understands LRP.
“Don’t expect to sign up and trade the same day because it gets hectic, and there is no guarantee you can get it done in a day,” he says.
Whether you are an LLC, partnership or sole proprietor, the application will need to show who is part of it and what percentage of ownership they have.
“Once USDA approves the application, you qualify for the 30% subsidized price through the risk management arm of USDA, so it’s going to save you money, and it is true insurance to protect you in case something happens,” Brackett says.
LRP can be purchased on a per-head basis offering options for producers of all sizes.
“You’re not required to do 50,000 lb. loads like you do with regular, traditional hedging in the futures market for options, so it lets people with smaller lots of cattle do it along with people who have 10,000 head of cattle or more use it,” Brackett says.
Another advantage of price insurance is for producers selling on video auctions.
“They can put price insurance on their cattle in January, sell their calves in July, and that’s when their price risk ends on their calves,” he explains. “If you’re not selling on those markets, you have to do your contract in December, not July, so it costs more. It’s a great tool because it allows them to take that price risk out. And you can purchase this stuff before your calves are born.”
As a cattle producer, Brackett says using price insurance as a risk management tool is important for him to protect his investment, and he encourages others to learn more about their options.
“It’s there in case something happens like screwworm comes into the United States and collapses our cattle market,” Brackett says. “Calves are worth on average over two grand, and it’s going to cost 3% to protect that value. That’s 60 bucks to protect two grand, and if something stupid happens, they’re worth 1,200 bucks. It’s a no brainer for me, and it’s a no brainer for a lot of financial institutions. They love it because it guarantees their customers are going to make a profit. You don’t have to worry about the market falling apart on you.”
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