By Jennifer Ifft, agricultural policy extension specialist and Sandy Johnson, Extension Beef Specialist, Colby
Livestock Risk Protection (LRP) is price insurance that pays out when market prices for feeder cattle (or fed cattle) are lower than expected. For example, if a producer calves in March and sells weaned calves around September, they can purchase LRP in March and “lock in” September futures prices. If by September, actual prices are lower than expected, they may receive a payment, or indemnity.
Two primary questions on insurance are “how much does it cost?” and “how much will I get paid?” Insurance also involves a “guarantee” or an estimate of how much revenue you can expect to receive for your cattle. The guarantee can help a producer understand (1) how much money is at stake and (2) the value of insurance.
In the example below, we show the LRP guarantee for a producer who is calving in September 2022 and plans to sell 50 calves in April 2023. If the producer purchased an LRP endorsement for ‘unborn steers and heifers’ on June 28, they would have selected a coverage price in the range of $172 to $191 per cwt, with producer premiums ranging from $2.13 to $7.48 per cwt. The producer must also select a target weight that, in addition to the coverage price, determines the LRP guarantee: coverage price times the target weight. For this example, we assume a target weight of 550 pounds or 5.5 cwt.
Table 1. LRP guarantee and premium for different coverage prices
| $191.09
(99.7% coverage level) |
$182.69
(95.3% coverage level) |
$172.19
(89.9% coverage level) |
|
| Guarantee per head | $1,051 | $1,005 | $947 |
| Producer premium per head | $41 | $26 | $12 |
| Total Guarantee | $52,550 | $50,239 | $47,352 |
| Total producer premium | $2,057 | $1,323 | $586 |
Note: Premiums are estimates only for June 28, 2022; coverage prices and premiums change on a daily basis based on market fluctuations. The LRP expected price for April 2023 feeder cattle (unborn steers and heifers) is $191.64/cwt. Guarantees and premium estimates are rounded to the nearest dollar. The total guarantee and premium are based on 50 head of 550-pound calves.
LRP indemnities make up the difference between the total guarantee and actual revenue, or on a per cwt basis: (coverage/expected price x target weight) – (actual price x target weight).1 Why does a producer need to consider the guarantee, in addition to the premium? First, understanding how the guarantee is calculated can help a producer understand sources of risk that LRP does not cover. While the LRP guarantee is based on national prices, producers could also experience larger drops (or increases) in their local or cash price than in the futures market (on which LRP prices are based). Second, knowing the value of the guarantee can help a producer better understand the amount of income at risk from price declines and the potential value of LRP to their operation. Third, estimates of expected revenue based on the LRP guarantee might be valuable for a lender, potentially leading to additional credit being extended or more favorable terms.
To summarize, the LRP guarantee is a measure of the income that LRP can protect for a cow-calf operation. Understanding the amount of revenue at risk or the insurance guarantee, as well as local price risk, is an important aspect of the insurance decision.
Funding for this work was provided by the North Central Extension Risk Management Education Center, the USDA National Institute of Food and Agriculture Award Number 2018-70024-28586.
