True or false? The only way to cover the bottom line of livestock is 1) by complicated marketing strategies that are only available to the big hitters in the livestock industry and 2) the average producer is at the mercy of the markets and local sale barn for what their cattle will bring. False.
Until recently, the scenario above was believed to be the case by many. Producers were possibly intimidated by complex marketing strategies and in turn were not able to effectively cover their bottom line. That has now changed with the advancement of Livestock Risk Protection (LRP) insurance. Livestock Risk Protection is a simple, yet effective way for a livestock producer to cover their bottom line, without the need for a complex marketing strategy.
LRP is simple. A livestock producer has 150 head of fed cattle in a feedyard. He plans to feed them until they reach a weight of 1400# and then sell them. He determines that they should reach the 1400# target weight around the 15th of November. The producer calls his agent at 3:30pm and determines that he can lock in coverage of $175.49/cwt on a 30-week endorsement. He decides to lock in coverage at that time.
LRP loss payments are not calculated based on what a producer sells his cattle for, but instead the index price of those cattle on the day that the endorsement ends. Therefore, if the established price on the day that the endorsement ends is below the coverage price that was locked in, an indemnity is due. Using our example, our producer locked in coverage at $175.49/cwt. The price on the day that the endorsement ends is $168.76/cwt, resulting in an indemnity of $6.73/cwt. On a 1400# steer, that would equate to indemnity of $94.22 per head.
The same concept is applied to feeder cattle, except that once an endorsement ends, there is no requirement for them to be “sold”. You can roll those cattle into a new LRP endorsement for the next stage in the operation, such as a fed cattle endorsement in the example above. There are many different lengths of coverage available ranging from 13 weeks up to 52 weeks. LRP is a simple and effective way for a producer to cover their bottom line. When paired with basic marketing, LRP becomes one of the most cost-effective ways for a livestock producer to add price protection to their livestock. In conclusion, LRP coverage is a simple put option that anyone can use.
LRP coverage is customized to each operation. With the ability to cover livestock from pre-birth, all the way to finished cattle, LRP is a great tool to use. At ASA, we believe in keeping things simple and the same idea applies when it comes to LRP coverage. We work with our producers to determine which coverage and endorsement lengths will best match up with their operations to establish an effective risk management plan.