Livestock Risk Protection (LRP)
As a rancher, you know that raising livestock comes with its fair share of uncertainties. Fluctuating market prices, unpredictable weather conditions, and unforeseen diseases can all pose risks to your operation. One tool that can help mitigate these risks is Livestock Risk Protection (LRP). In this article, we will explain LRP in simple terms, helping you understand how it can safeguard your livestock and ensure a stable future for your ranching business.
Understanding Livestock Risk Protection (LRP)
LRP is a risk management program offered by the United States Department of Agriculture (USDA). It provides livestock producers like yourself with a financial safety net to protect against declining market prices. Essentially, LRP is an insurance policy for your livestock, allowing you to lock in a guaranteed minimum price for a future sales period. It is closer to the actual ending value of the livestock, and is based on cash market index prices rather than the futures market. The premium is subsidized (see table below), by the Federal government.
What Livestock Risk Protection (LRP) is not.
LRP does not cover mortality for livestock. It only protects against a decline in market price below the selected coverage price.
When you can purchase Livestock Risk Protection (LRP).
LRP is generally available Mondays through Fridays from 3:00 PM until 8:00 AM MST (the next day). Sales are not available on Sundays, Monday mornings, and/or Federal Holidays. There are also some scenarios when sales will be halted (see image below).
How Does Livestock Risk Protection (LRP) Work?
The LRP program allows you to purchase insurance coverage that pays you the difference if the actual market price* for your livestock falls below the coverage price you selected. Let’s break down the process into simple steps:
- Determining Coverage: Before purchasing LRP coverage, you need to determine the number of animals you want to insure and the specific weight range. This ensures that the coverage aligns with your herd’s characteristics. You will need to take the Price Adjustment Factor (PAF) into account (each type of livestock has their own PAF – see example below).
- Choosing Coverage Price: You’ll need to select a coverage price, which represents the minimum price you’ll receive for your livestock.
- Feeder Cattle, for example, use a 7-Day weighted average from 12 Feeder Cattle producing state (see image below)
- Prices are announced: RMA releases prices each day, when sales are available, by 3:30 PM MST. The expected end value (price) is a daily forecast of the Chicago Mercantile Exchange (CME) Feeder Cattle Index for the date the LRP contract terminates. The CME Feeder Cattle Index is a moving seven day weighted average of feeder cattle prices reported daily by USDA in a 12-state region (see image below).
- Choosing Period: The coverage period is the date your livestock are to be ready for market and/or reach the target weight; count the number of weeks from “today” until the date your cattle normally are marketed or will reach the desired weight (within 60 days of this date – note: 60 days is referring to the end of the insurance period and not the length of the insurance period).
- Note – each livestock type has their own minimum and maximum length of time (insurance period – see chart below).
Choosing Number of Head to insure
Feeder and Fed cattle have a limitation to the number of head you can insure per Subsidy Coverage Endorsement (SCE). The maximum head you can insure per SCE is 12,000. The maximum head you can insure per Crop Year is 25,000.
You can never insure more then you own / double insure your livestock. Once you insure 100% of your livestock you have no more livestock eligible to insure for that crop year under this program.
- Paying Premiums: Similar to any other insurance policy, you’ll need to pay a premium to participate in the LRP program. The premium is calculated based on factors such as the coverage level, market volatility, and the length of the coverage period. The overall premium is subsidized by the Federal government up to 55% depending on what options you take.
- Premium is paid at the end of the endorsement period.
- Loss Calculation: At the end of the insurance period, the coverage price is compared to the actual ending value published by RMA to determine if there may be an indemnity due.
*actual market price – NOT the price you get paid for your cattle. The price for LRP coverage is based on the current market prices for livestock. The USDA collects and analyzes market data to determine the prevailing prices for different classes and weight ranges of livestock. The ending value of an LRP contract is NOT the cash price received by the producer nor a closing futures price.
Benefits of Livestock Risk Protection (LRP)
By utilizing LRP, you can enjoy several advantages that contribute to the stability and profitability of your ranching business:
- Price Protection: LRP safeguards you against sudden price drops, ensuring that you receive a guaranteed minimum price* for your livestock.
- Flexibility: LRP allows you to choose the coverage price and period that best suits your operation’s needs, giving you flexibility in managing risks.
- Increased Financial Security: By mitigating price risks, LRP provides you with greater financial security. It helps protect your bottom line and ensures that you can cover expenses and maintain profitability, even during challenging market conditions.
- Peace of Mind: Knowing that you have a safety net in place can alleviate stress and allow you to focus on other aspects of your ranching business, such as animal care and improving productivity.
Livestock Risk Protection (LRP) – Feeder Cattle Example
Walking through an example of how the coverage works will help you gain a better understanding of the program.
Contract Data
Let’s say we have a rancher that owns 2,000 head of cattle, but only wants to insure 1,000 of them. This rancher typically sells his cattle the middle of November each year, and the target weight for the rancher’s feeder cattle is 750 lbs.
The rancher calls the crop insurance agent on a Wednesday evening to purchase a policy as the rancher has been watching the prices for quite sometime now, and wants to lock it in. The rancher elects to take the 98.40% coverage level (coverage levels are published w/prices each day).
The image below shows this contract data.
Policy Data
Now that the rancher/insured has selected their pricing let’s take a look at what that looks like in terms of coverage, subsidy, and premium.
The insured value (coverage) is simply the number of head insured x cwt x coverage price.
NOTE – Coverage Price = Expecting Ending Value x Coverage Level! This is an easy step to forget, but is incredibly crucial as you need to take your Coverage Level into account!
Now that we have the Coverage amount the system will automatically calculate the premium due to the rancher/insured. The premium for the rancher/insured is the Gross Premium minus Subsidy Amount (remember the chart above for subsidy calculations – just for reference as system does this for you).
Bottom line:
Insured Value for this rancher/insured = $922,500
Producer premium = $19,308
See table below for a more in depth view of the example policy data.
Loss Example
The rancher/insured sells the 1,000 head of 750 pound steers on 11/10/2023 for $120.00/cwt. Keep in mind that what the rancher/insured sells their cattle for does not affect the policy!
The Coverage Price (from the tables above) was $123.00/cwt (remember, we took the CME Expected Ending Value times the Coverage Level or $125.00 * 0.984).
The Actual CME Ending Value for 11/15/2023 was $110.00/cwt.
The loss payout would then be as follows:
(Number of Head * cwt/hd) * (Coverage Price – Actual Price)
(1,000 * 7.50) * ($123.00 – $110.00)
7500 * $13.00
$97,500 Gross Loss
Net Loss (subtract premium: $97,500 – $19,308) would be $78,192.00
Want to estimate your own loss?
Simply visit our LRP Loss Calculator to play around with your numbers.
Important Notes
The above loss example assumes a lot of things went according to plan. The insured sold their cattle when they thought they would, the cattle were the weight they hoped they would be, and they sold the full amount of cattle.
If anything changes with the date you sell, weight of cattle, and/or number of cattle sold there can be penalties that come into play. In our example the insured did not choose to insure all of their cattle, so they had more then enough “wiggle room” when it came to the number of cattle they sold. They also hit their target weight so there were no penalties there either.
At any time during the insurance period you lose some cattle, sell some cattle, etc. you will need to notify your agent right away.
Conclusion
Livestock Risk Protection (LRP) is a valuable risk management tool for ranchers like yourself. By offering protection against declining market prices, LRP can help stabilize your operation and ensure a sustainable future for your livestock business. Consider exploring LRP as part of your risk management strategy and consult with local USDA representatives or insurance providers to determine how it can best benefit your specific circumstances. With LRP in place, you can face uncertainties with greater confidence, knowing that you have taken steps to protect your livelihood.
Disclaimer
There are a lot of rules behind this program, so the above information is very high level. You will want to take a deeper dive into understanding the program before making a purchasing decision. Keep in mind the above information is for informational purposes only, and does not replace anything found in the Crop Insurance Handbook, Loss Adjustment Manual, RMA’s website, etc. Always consult the Crop Insurance Handbook, Loss Adjustment Manual, RMA’s website, etc. before making a purchasing decision. Any discrepancy between the above information and the policy is not intended. The information provided in this article does not supersede policy and procedure. Any changes to the policy and procedures may make this material obsolete.
