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By Michael Sweeney, vice president, Bickle Farm Solutions
If you have been following the cattle market the past 12 months, you know that it has been quite a ride. It seems like almost weekly we see a new record high in feeders or live cattle, and it does not appear that there is an end in sight to it right now. The hog market has been no slouch either. Everyone selling loves record setting prices, but those prices are only as good as the plan you have in place to capitalize on them.
It has been awfully hard to miss in the cattle market in the last year. Feeder cattle have been moderately priced while fats continued to soar higher. But here recently that gap has narrowed quite a bit, causing a tighter margin and more opportunity for a cattle producer to make a mistake. Forward contracting your fat cattle is always a good way to lock in some margin. Contracts can work very well for some, but not all.
In 2003, the Federal Crop Insurance program introduced Livestock Risk Protection, or LRP. The program has seen a couple overhauls since its inception, but the general idea of it has never changed. The purpose is to allow livestock producers to insure against price declines. It is written through your crop insurance agent, provided they have the proper certifications and a company that participates in the program. Not all insurance providers offer LRP. It is also subsidized just like any other crop insurance policy.
The mechanics of the policy are fairly straightforward. For fed cattle, the producer chooses the number of head to cover, the target selling weight, and the amount of time the cattle are to be insured. The coverage periods are anywhere from 13 to 52 weeks long. An expected ending value (coverage price) is calculated based on the board price of cattle the previous day. The producer is then able to pick different coverage levels anywhere from 89% up to 99%. The coverage level values are not fixed numbers, so there will be variation in the exact percentage from endorsement to endorsement. If at the end of the insurance period the coverage price is lower than the actual ending value, there is a payment. The actual ending value is calculated daily based on weighted prices and is posted on the Risk Management Agency’s website.
Sounds simple, right? The truth is LRP has confused several people to the point of them not wanting to try it. This is true for both agents and producers. There are some things about the program that are difficult to understand. But, I believe this tool is valuable enough to anyone producing livestock to warrant spending a little time trying to navigate it. Think about the power in being able to buy feeder cattle today, and tomorrow lock in a price on them to at least cover the cost of production or even better lock in a margin.
Of course there is a cost associated with all of this. Many are probably wondering why any fool would want to add anymore underlying cost to production with already tighter margins and high input costs. Those in doubt may not be completely wrong. But I would ask, can you afford not to? For instance, as I write this article today, 700 to 800 pound steers at my nearest market sold at $170 per cwt last week. You could take out an LRP policy on those cattle expiring at the end of January to lock in $185.25 per cwt today (99% coverage level) for about $66 per head or go down to the 89% coverage level for a little over $10 per head. It is all about comfort level and how much risk you are willing to leave on the table.
I think the best way to capitalize on the use of this tool is to combine it with your current futures, contract, cash strategy. If a producer really wants to get the most out of LRP, it will require bringing your agent and your trade advisor together for a conversation. And most importantly you need to make sure that your agent understands what you are buying. It is easy to quote this stuff, but to know exactly what you are quoting and how it works is a different story. This may be one of the cheapest and most effective risk management tools available to a livestock producer, and with the right team could be one of the easiest to use.
Bickle Farm Solutions is an ag risk management firm specializing in farm and crop insurance as well as legacy/financial planning for medium to large grain, animal confinement, and dairy operations across the state of Ohio.
