By Jennifer Ifft, agricultural policy extension specialist
Livestock Risk Protection (LRP) is a livestock price insurance product that is like a put option. Buyers and sellers of commodities use futures markets to “hedge” or protect their anticipated profit margin from unexpected price changes. Producers can hedge feeder cattle prices with either futures or options. We will use the example of a producer who is calving in April and plans to sell around November.[1]
An options contract, or a ‘put option’ in the case when you are selling feeder cattle, gives the producer the right but not the obligation to sell at a specific price in a specific futures contract. For example, a producer selling feeder cattle in November currently can purchase a put option at a strike price of $182 per cwt. This put option would cost around $8.15 per cwt and allow the holder to sell the August contract at $182 any time before expiration. The producer can still benefit from higher actual prices, less the cost of purchasing the option.
Livestock Risk Protection (LRP) is price insurance that pays out when market prices for feeder cattle are lower than expected. The current LRP expected price for feeder cattle being sold in November is around $182.94/cwt, similar to the futures price. A producer can purchase an LRP policy (or endorsement”) at “coverage prices” which range from around $163/cwt to $181/cwt. If the actual price in November is less than the producer-selected coverage price, the producer will receive an indemnity. The table below shows the estimated cost of current LRP coverage price choices.
Current LRP-feeder cattle costs
| Coverage price | Producer Premium |
| $181.17 | $5.91 |
| $177.17 | $4.63 |
| $173.17 | $3.29 |
| $169.17 | $2.51 |
| $165.17 | $1.88 |
| $163.17 | $1.49 |
Note: Estimated premiums for steers greater than 600 pounds that will be sold in November for selected coverage prices collected on 4/25/2022 from https://public.rma.usda.gov/livestockreports/main.aspx. Official premiums vary daily and can only be provided by an insurance agent.
The highest coverage prices have a higher cost because it is much more likely that actual prices in November will be below $181 than below $163. Further, any indemnities for higher coverage prices will be larger.
Currently available LRP coverage prices have a government cost share of 35-45%, which is higher than in the past. LRP is also cheaper than purchasing a put option due to this cost share: a put option for a strike price of $182/cwt currently costs around $8.15 per cwt, while an LRP endorsement with a coverage price of $181.17 would cost $5.91/cwt. A put option thus offers an effective price floor of $173.85, while LRP can currently offers a price floor of $175.26.
Another issue for cow-calf producers may be the required minimum futures or options contract size of 50,000 pounds, which is equivalent to about 71 700-pound calves.[2] LRP offers more flexibility for smaller producers: 1 to 6,000 cattle can be enrolled in a single endorsement, with an annual limit of 12,000 head. Some cattle producers that have an established hedging strategy may use a combination of LRP and futures and options. The lower cost and flexibility of LRP make it worth consideration for any producer who is evaluating different options to manage price risk.
More detailed information about price risk management for cow-calf producers is available on AgManager.info including historic performance of livestock risk protection insurance to be used as a decision aid.
[1] Typical calving dates vary throughout Kansas. While the numbers may slightly change, this example is applicable for any spring calving date.
[2] Feeder cattle futures contract specifications are for 700-849 lb. feeders. Producers hedging lower-weight calves face the risk that cash prices for calves at different weights may diverge.
