Author: Chris Boyer

In our recent  Southern Ag Today article, Uptick in Livestock for Feeder Cattle, we showed that Livestock Risk Protection (LRP) purchased for feeder cattle has increased starting in 2021. LRP, an insurance policy that cattle producers can purchase daily to insure a minimum price level for a certain period, is also available for fed cattle (cattle greater than 1,000 pounds). One of the reasons why LRP was developed was to provide producers who do not sell 50,000 pounds of cattle at one time, which is a futures and option contract increment, an opportunity to hedge cattle. Fed cattle, however, are typically grouped and sold in larger loads, which better suits them to use futures and options to hedge cattle. The 2019 and 2020 increase in the premium subsidy rate for LRP did lower the cost of LRP to producers (Boyer and Griffith 2023a,2023b) and did appear to influence producers to purchase more fed cattle LRP contracts. In 2021 and 2022, the number of head and contracts sold has increased nearly four times (as opposed to the tripling in feeder cattle policies). Thus far in 2023, there has been a record number of LRP contracts sold and head insured. Similar to the feeder cattle contracts, the number of fed cattle insured with LRP is still relatively small compared to the number of eligible cattle. However, this policy tool seems to be growing in use and with increasing fed cattle prices, it will be interesting to see how many policies are purchased through the rest of the year.  

References

Boyer, C.N., and A.P. Griffith. 2023a. “Subsidy Rate Changes on Livestock Risk Protection for Feeder Cattle” Journal of Agricultural and Resource Economics 48(1):31-45. (Link)

Boyer, C.N., and A.P. Griffith. 2023b. “Increasing Livestock Risk Protection Subsidies Impact on Producer Premiums” Agricultural Finance Review 83(2):201-210. (Link)

Boyer, Chris, Charley Martinez, Eunchun Park, Andrew P. Griffith, and Karen L. DeLong. “Uptick in Livestock Risk Protection for Fed Cattle.” Southern Ag Today 3(25.2). June 20, 2023. Permalink

Livestock Risk Protection insurance (LRP) is a price insurance policy livestock producers can purchase to reduce price risk and losses, but LRP is not widely used by cattle producers. Several reasons could explain why few producers have not used LRP in the past, but the cost of LRP is a big reason. In 2019 and 2020, the LRP premium subsidy rate was increased to reduce the insurance premium cost to producers. The premium subsidy increased to 20% from 13% of the total premium cost in 2019. Then, in 2020, a tiered subsidy rate was set. Subsidy rates became 35% for coverage between 95–100%, 40% for coverage between 90–94.99%, 45% for coverage between 85–89.99%, 50% for coverage between 80–84.99%, and 55% for coverage between 70–79.99%. We recently published research analyzing the impact of the premium subsidy rate increase on feeder and fed cattle LRP costs. We found producers’ premiums for feeder cattle LRP policies were reduced between $1.41-$1.90 per cwt and $0.95-$1.56 per cwt for fed cattle LRP policies with the new subsidy rate. The figure shows the range of cost savings based on coverage level. These changes also increased the chances a LRP policy would pay an indemnity greater than the premium. In the past, indemnity payments would rarely be higher than the premium cost. These policy changes significantly reduced LRP cost, which might make LRP a more viable risk management tool for producers. 

Figure 1. Reduction in Producer Premiums for Feeder and Fed Cattle LRP policies from Recent Subsidy Rate Increases

Citation 

Boyer, C.N., and A.P. Griffith. In press. “Increasing Livestock Risk Protection Subsidies Impact on Producer Premiums” Agricultural Finance Review Available at: https://www.emerald.com/insight/content/doi/10.1108/AFR-05-2022-0066/full/html#:~:text=The%20increased%20subsidy%20in%202019,is%20lower%20to%20start%20with.

Boyer, C.N., and A.P. Griffith. In press. “Subsidy Rate Changes on Livestock Risk Protection for Feeder Cattle” Journal of Agricultural and Resource Economics Available at: https://ideas.repec.org/a/ags/jlaare/316752.html

Boyer, Chris, and Andrew Griffith. “Livestock Risk Protection Cost is Lower“. Southern Ag Today 2(36.2). August 30, 2022. Permalink