On June 9, USDA’s Risk Management Agency announced changes to the Livestock Risk Protection insurance program for swine, fed cattle and feeder cattle. The improvements, which include moving premium due dates and increasing premium subsidies, will be implemented by July 1 for the 2021 crop year. In addition to the changes, RMA is authorizing additional flexibilities, spurred by the COVID-19 pandemic, for producers working with approved insurance providers.
LRP is an insurance plan designed to protect against a decline in market price. LRP is typically available for fed cattle, feeder cattle, swine and lamb. Policyholders may choose from a variety of coverage levels and insurance periods that match the time livestock would normally be marketed. Interested producers must submit a one-time application for coverage, and once the application is accepted, producers may purchase specific coverage endorsements daily throughout the year. Premium rates, coverage prices and actual ending prices are posted online daily. Coverage levels range from 70% to 100% of the expected price, and if at the end of the insurance period the actual ending price is below the insurance guarantee, a producer will receive an indemnity payment for the difference between the coverage price and the actual ending value.
For LRP-Fed Cattle insurance, producers can buy specific coverage endorsements for up to 2,000 head of heifers and steers, weighing between 1,000 and 1,400 pounds, that will be marketed for slaughter near the end of the insurance period. Producers face an annual limit of 4,000 head for each crop year. Specific coverage endorsements are available in various lengths between 13 and 52 weeks.
For LRP-Feeder Cattle insurance, producers can purchase specific coverage endorsements for up to 1,000 head of feeder cattle that are expected to weigh up to 900 pounds at the end of the insurance period. The annual limit per producer is 2,000 head for each year, and all insured calves and cattle must be located in a state approved for LRP-Feeder Cattle at the time the policy is purchased. Each specific coverage endorsement can be purchased for a length between 13 and 52 weeks. Coverage is available for calves, steers, heifers, predominantly Brahman cattle and predominantly dairy cattle. Producers have the option of choosing from two weight ranges, under 600 pounds or between 600 and 900 pounds.
For LRP-Swine insurance, producers can buy specific coverage endorsements for up to 20,000 hogs that are expected to reach market weight near the end of the insurance period. The annual limit per producer is 75,000 hogs for each crop year, and the length of insurance coverage available for each specific coverage endorsement is specific intervals between 13 and 26 weeks.
An Example of LRP Calculations
Let’s look at an example of how a producer who purchased coverage long before any coronavirus market ramifications could have been imagined would have fared. Using the RMA website, we can look at a policy that would have been purchased on Jan. 2, and view an endorsement length of 17 weeks, which would have expired on April 30, during market lows for fed cattle. Let’s say an operation has 100 head of fed cattle and anticipated marketing the cattle at 1,100 pounds, or 11 cwt, each.
On Jan. 2, the expected end value for fed cattle was $125.88, and at a 99.45% coverage level, the coverage price was $125.18. For an endorsement length of 17 weeks the final end date was April 30, and the actual end value was $102.63. Using the 100 of head of cattle in our example, the insured value is $137,698, resulting in a producer premium of $4,110. A producer who purchased this specific coverage on Jan. 2, would receive an indemnity of $24,805 and the net indemnity would be $20,695.
In looking at the data, we can see how the actual value changed over time and view how the indemnity payment developed over that same time period, Figure 1.
Changes to LRP
On June 9, USDA announced improvements to LRP to make these policies more usable and affordable for livestock producers. One change is to allow premiums to be paid at the end of the endorsement period as opposed to on the purchase date, bringing LRP more in line with other insurance policies. Another change to the program is to increase the premium subsidy for coverage levels above 80%. Those with an 80% or higher coverage level will get a 5-percentage point subsidy increase, making these higher coverage levels more affordable for producers. Figure 2 shows the previous subsidy levels as well as the new changes.
LRP insurance is a valuable risk management tool available to livestock producers throughout the year. Producers buy LRP insurance from approved insurance providers, with coverage prices ranging from 70% to 100% of the expected ending value of their animals. At the end of the insurance period, if the actual ending value is below the coverage price, producers will be paid an indemnity for the difference. USDA’s RMA recently announced changes to the program, including moving premium due dates to the end of the endorsement period and increasing premium subsidies to assist producers.