Is there an Opportunity to Protect a Profit with Livestock Risk Protection Insurance?
Source: University of Nebraska Extension
Prices for calves, feeder cattle and finished cattle have set some new records this fall and early winter. A combination of circumstances has precipitated these historic prices. There is currently a lot of cautious optimism on the part of cow-calf producers as they look at the future.
- Grain prices have moderated considerably from 2012.
- Significant late summer and fall precipitation has been received in the Great Plains.
- Beef cow numbers are at historic lows dating back to the 1950's.
- Demand from feeders and packers is soaring due to tight supplies.
These current high prices may provide cow-calf and stocker/yearling producers an opportunity to protect a profit utilizing Livestock Risk Protection Insurance (LRP) as they look to market calves and feeder cattle after the first of the year through next spring.
LRP is single-peril price risk coverage for future livestock sales. Purchasing of this insurance provides price risk protection by paying producers if the national cash price index falls below the insured price level at the ending date of the policy. The USDA Risk Management Agency (RMA) offers the insurance as an alternative to traditional futures and options. For producers who purchase an LRP policy, coverage works similar (but not identical) to a put option. By purchasing a policy, the producer sets a floor price while leaving the opportunity open to participate should prices rise.
There are some advantages to producers in utilizing LRP insurance as compared to a traditional feeder cattle contract or purchase of an option. One is the flexibility in the number of cattle that can be insured. There is no lower limit to the number of cattle that can be insured. This makes the tool an attractive option for producers who may not have enough cattle for a 50,000 pound futures or option contract. Another advantage is the 13% subsidy for purchase of the insurance from the USDA.
LRP is a risk management tool that cattle producers should consider in today’s market environment. The UNL Extension NebGuide Livestock Risk Protection Insurance and webinar "Livestock Risk Protection for Calves and Feeder Cattle" are two resources that explain the product and how it can be utilized as part of a marketing risk management plan.
Current and future cattle prices look very good. Now may be a prudent time to protect a profit
