Livestock Risk Protection

Why it matters and how to get started

The Illinois Beef Association is committed to providing its members with up-to-date information about beef industry issues, especially when it comes to the vitality of any one farmer’s operation. Naturally, one of the most important aspects of this is the priority of farms to be economically sustainable. Contrary to some of the media’s perception of the industry, the many alternatives that continue to appear and the decline in number of cattle in the United States, the market continues to see steady demand and increased product quality. This has resulted in a projected outlook that cattle feeders will see, if they have not begun to already, profits increasing in a way unseen by them before. In a changing economic and beef production climate, it is imperative producers keep their eyes open to year-long trends and projections, as well as plan for any unforeseen change in the market.

“You can do everything right as a producer, and at the end of the day when it is time to market your animals you could be hung out to dry,” says John Strohl, Farm Credit Illinois livestock insurance agent. “[Livestock Risk Protection] allows producers to mitigate the risk in the market for factors that are out of their control.”

According to the United States Department of Agriculture, National Agricultural Statistics Service Meat Animals Production, Disposition, and Income 2022 Summary published in April, “the 2022 gross income from cattle and calves and hogs and pigs for the United States totaled $117 billion, up 16 percent from 2021. Gross income increased 18 percent for cattle,” and “cash receipts from marketings of cattle and calves increased 18 percent, from $72.7 billion in 2021 to $86.1 billion in 2022. All cattle and calf marketings totaled 61.6 billion pounds in 2022, up 1 percent from 2021.”2

Plus, the USDA, Economic Research Service, is projecting higher prices for feeder steers in the final quarter of 2023 and in the first half of 2024.1 This is likely due to cattle numbers shrinking as quality and cost of production increases.

“Anybody that has been a producer in this industry for any amount of time knows this rollercoaster comes down just as fast as it goes up,” Strohl says. He believes insurance is a great way for producers to have peace of mind in fluctuating markets.

To stay up-to-date on cattle futures, visit IBA-trusted resources such as CattleFax (www.cattlefax.com), USDA ERS (www.ers.usda.gov) or University of Illinois’ farmdoc (farmdoc.illinois.edu).

Livestock Risk Protection

It is good to know there are resources available to producers facing changing economic seasons, and with increasing profits comes increased risk. You never know when prices will drop leaving behind a sticky situation. One way to mitigate the costs of those unforeseen market changes is to take advantage of Livestock Risk Protection (LRP-Feeder Cattle or LRP-Fed Cattle).

The USDA Risk Management Agency says this program is designed to insure against declining market prices. This insurance can be purchased from any Risk Management Agency-approved livestock insurance company and coverage can range from 70-100 percent of the expected ending value. The RMA website includes program coverage prices, premium rates and actual ending values per hundredweight insurance cost. ⁵

How It Works

According to ProAg, a crop insurance company based out of Amarillo, Texas, producers can use LRP to secure a floor market price for a certain number of head and for a specified period, so that, if the RMA determines the ending value is below that floor, the producer may be eligible for an indemnity payment. ⁴

For LRP-Feeder Cattle, coverage levels and insurance periods are based on when your feeder cattle are normally marketed, then LRP-Fed Cattle levels and periods correspond to when you normally sell your marketweight cattle. Furthermore, ending values are based on weighted average prices from the Chicago Mercantile Exchange Group Feeder Cattle Index for feeder cattle and weighted prices from USDA’s Agricultural Marketing Service for fed cattle. All are posted on RMA’s website at the end of an insurance period. ⁵, ⁶

“With LRP, you have the ability, if you like the prices that are out that day, to purchase an endorsement, and lock it in,” Strohl says. “And there is not a perhead requirement, it could just be one head a day, or a group.”

Strohl says producers should know this is not a death loss program, and it does not matter how you sell your livestock for you to be involved in the program. “If you locked in $1.90 but sold yours for $1.80, that does not mean you’re getting a 10 cent payment,” he says. “You are using government subsidized money to put a floor on the price.”

To get involved, you must submit a one-time free application with an LRP provider. Once accepted, it is considered a continuous policy and specific coverage endorsements may be purchased for up to 12,000 head of feeder cattle expected to weigh up to 1,000 lbs. at the end of the insurance period or 12,000 head of heifers and steers weighing between 1,000 and 16,000 lbs. to be marketed for slaughter around the time the insurance period ends.⁵, ⁶, 3 These are not continuous and are only effective for the period stated.3 Both are limited to 25,000 head per producer per year, a year being June 30 to July 1 the following year.⁵,⁶ There are a few different time spans available for a specific coverage endorsement – 13, 17, 21, 26, 30, 34, 39, 43, 47 and 52 weeks.⁵,⁶ Please note LRP-Feeder Cattle is available for calves, steers, heifers, predominately Brahman cattle, predominantly dairy cattle and unborn calves and you may choose between two age ranges – either 100-599 lbs or 600-1,000 lbs. ⁵, ⁶

Strohl likes to meet with producers, figure out what their operation is like and then send them quotes as frequently as needed to find a market price for the producer to lock in. Prices come out at 4 p.m. and producers have until 8:25 a.m. the next morning to lock in a price.

ProAg gives an example of what subsidy levels look like federally: 70-79.99% coverage level means a 55% subsidy, then dropping 5% for every 10% increase in coverage level. So, at 100% coverage there is a 35% subsidy. 3 You can calculate an example premium by using this equation:

Multiply the number of head in your operation by your target weight in cwt, then multiply that by the coverage price. Multiply this by the Price Adjustment Factor(percentage), then multiply by the rate to reach your total premium. Now multiply your total premium by the producer premium subsidy percentage, then subtract that number from your total premium to get the producer premium.3

Now, to calculate an indemnity multiply your number of head by your target weight(cwt), then subtract your actual ending value from your coverage price ($/cwt). Multiply those two answers, then multiply by the insure share to equal your indemnity payment.3

Please visit rma.usda.gov to find more detailed information regarding LRP, a list of approved agents and current livestock reports. Jon Strohl can be reached at 217-500-0886.

Sources

1. U.S. Department of Agriculture, Economic Research Service. (2023). Livestock, dairy, and poultry outlook: September 2023 (Report No. LDP-M-351).

2. U.S. Department of Agriculture, National Agricultural Statistics Service. (2023). Meat Animals production, Disposition, and Income 2022 Summary: April 2023.

3. ProAg. (2023). Livestock Risk Protection Feeder Cattle.” www.ProAg.com, LivestockCampaignFeederCattleBrochure_Web.pdf.

4. ProAg. (2023). Livestock Risk Protection Feeder Cattle.” www.ProAg.com, 23-01016_ PA_2023LivestockInfographic_Web.pdf.

5. U.S. Department of Agriculture, Risk Management Agency. (April 2022). Livestock Risk Protection Feeder Cattle.

6. U.S. Department of Agriculture, Risk Management Agency. (April 2022). Livestock Risk Protection Fed Cattle.