LIVESTOCK RISK PROTECTION
Producers Livestock Credit Corporation (PLCC) is offering Livestock Risk Protection Insurance
PLCC has appointed Darrell Ziola to handle Livestock Risk Protection (LRP) insurance sales. Producers Livestock has entered into an insurance sales associate agreement with Farmers National Company to handle all livestock insurance sales. Farmers National Company is a duly licensed insurance agency and brokerage in all 50 states and has its corporate headquarters in Omaha, Nebraska.
LRP is a program introduced in 2002 by USDA –Risk Management Agency (RMA) to provide another alternative for protecting price levels for future sales of cattle and hogs. As a single-peril product, LRP only insures against price level declines, and no other cause of loss is insured such as death or poor performance of livestock. LRP operates much like a put option in that it allows producers to establish a floor price for protection; however, leaves the top side open to participate in price rallies. This program is designed for use as a management tool not as a price capturing mechanism or profit enhancer. Generally, LRP will not help a producer make an extra buck but will help prevent large potentially devastating losses to an operation in the event of substantial price declines.
How LRP Works
As indicated earlier, LRP is similar to buying a put option. To protect against downside price risk with the LRP contract, coverage is purchased by selecting the endorsement length with an end date closest to the projected marketing date of the livestock. Producers then will select a coverage price (minimum sale price), which is based on a percentage coverage level (between 70 and 95 percent) of an expected ending value. Participants will then pay an insurance premium to lock in a minimum selling price (coverage price) and at the end of the coverage period, an indemnity is paid if prices (actual ending value) are less than the coverage price.
Livestock Eligibility with LRP
LRP insurance is available for fed cattle, feeder cattle up to 900 pounds and markets hogs. The range of qualifying livestock is fairly broad. For fed cattle and market hogs, the LRP program includes most market livestock; and for feeder cattle, there is a range of qualifying weights and types of livestock. The livestock are expected to meet certain quality and weight requirements. Fed cattle that are insurable include both steers and heifers that will grade Select or higher, Yield Grade 1 to 3, weighing 1,000 to 1,400 (live weight). Covered feeder cattle are divided into two weight classes: less than 600 pounds and 600 to 900 pounds. Steers, heifers, Brahman and dairy breeds in both weight classes can be insured. For the swine program, market hogs (barrows and gilts) must weigh 150 to 225 on a dressed weight basis.
State Eligibility for LRP
For the 2006 crop year which includes July 1, 2005 – June 30, 2006, LRP insurance is available on feeder cattle, fed cattle and swine in 20 states. The 20 eligible states are Colorado, Iowa, Illinois, Indiana, Kansas, Michigan, Minnesota, Missouri, Montana, North Dakota, Nebraska, Nevada, Oklahoma, Ohio, South Dakota, Texas, Utah, West Virginia, Wisconsin and Wyoming. Producers Livestock currently provides customer service to 12 states that are eligible for LRP.
It is not necessary to reside in one of the previously mentioned states however the insured livestock must be located there.
Endorsement Lengths for LRP
LRP provides some flexibility in the length of coverage offered. There are several alternatives available that producers may select to correspond to the marketing date of the livestock. Endorsement lengths for fed cattle and feeder cattle are 13, 17, 21, 26, 30, 34, 39, 43, 47, or 52 week period. Endorsement lengths for swine are 13, 17, 21, or 26 weeks. To determine the proper endorsement length, producers need to calculate the amount of time needed until the livestock are market ready and choose an end date closest to that time. Provisions allow some flexibility. The livestock can be sold up to 30 days prior to the end date of the insurance and any time thereafter. However, if the insured livestock are sold before the 30 day window of coverage end date, the insurance coverage is void and premiums are not refunded.
LRP Program Limits
For a given crop year (July 1, 2005 to June 30, 2006), a producer can insure up to 32,000 hogs, 4000 fed cattle, and 2,000 feeder cattle. The maximum number of head per one Specific Coverage Endorsement (SCE) is 10,000 hogs, 2,000 fed cattle and 1,000 feeder cattle.
LRP Enrollment and Purchasing Coverage
All owners of livestock located in eligible states can apply for an LRP policy. To enroll, a producer needs to complete and sign an application. The application asks for general information such as address, phone numbers, social security, type of livestock to be insured, and a few questions about Conditions of Acceptance. Darrell Ziola will then submit all information to the RMA online database system (eDAS). After USDA approves the policy, RMA will assign a policy number for the applicant. Enrolling in the program and receiving the policy number establish the right, but not the obligation, to purchase livestock insurance coverage. Coverage cannot be purchased without completing the proper application process. The day that a producer decides to purchase coverage is generally not the day to begin the enrollment process. So, if you are planning to cover livestock prices using LRP, please enroll in advance.
Once enrolled, LRP can be purchased at any time a producer chooses. Coverage can be obtained as follows: Monday through Friday 5:00 PM until 9:00 AM (Central Time) the following day. To purchase coverage, a Specific Coverage Endorsement (SCE) to LRP Application form needs to be completed and signed by the participant. Information required for a SCE includes the number and type of livestock insured, the target weight, coverage price and the end date to calculate the premium cost for the coverage. USDA provides a subsidy that pays 13% of the premium cost for producers. LRP price coverage is not actually in place until a SCE is filed. Once the SCE is filed, the coverage is bound and the cost is incurred. When filing a SCE, there is no minimum number. This feature makes LRP more flexible; and is more beneficial to producers with small herds. When using options or futures contracts, a producer may not have enough livestock to fill a Chicago Mercantile Exchange (CME) contract. With LRP, the producer can insure small groups of livestock at various times.
Questions About LRP
If you have any questions about LRP, please contact Darrell Ziola at 1-800 950-7522 extension#1117. The University of Nebraska –Lincoln Agriculture has a good website about LRP (http://lrp.unl.edu). Information for this article was taken from this website. If you are considering using LRP, please call Darrell so he can mail or fax an application to you. As mentioned earlier, there is no charge to enroll in the LRP program.
You as the producer will make the decision to use LRP insurance, CME options or futures contracts to price protect your livestock. Darrell will not try to influence your decision; however, he will offer a comparison of premium costs for LRP coverage level versus put option premiums at strike price closest to LRP coverage level. For advice on futures or CME options, please contact our Commodity office in Sioux City at 1-800-831-5936.
Last update: 11/21/2005