USDA’s Risk Management Agency on January 19 announced changes to the Livestock Risk Protection insurance program for swine, fed cattle and feeder cattle. These improvements build upon changes implemented by RMA over the past year. Effective January 20, these LRP enhancements are part of a larger RMA effort to provide additional, improved options for farmers.
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. (LRP Lamb is currently suspended due to pricing information issues.) Policyholders may choose from a variety of coverage levels and insurance periods that match the time livestock would normally be marketed. Once a producer’s one-time application for coverage is accepted, they 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.
In purchasing LRP coverage, the peril that producers are insuring against is a decline in price. They are not protected from death loss, physical damage to the animals or anything that impacts revenue, other than a price decline, such as input or cost increases. LRP functions similarly to put options in that it locks in a price floor, protecting a producer against downside risk while essentially leaving open unlimited upside potential. However, in contrast to put options, there are a variety of flexibilities built in that make it attractive for smaller producers. One of those flexibilities is that LRP does not require a minimum number of animals to enroll, as opposed to options and futures, which have minimum weight requirements; this could be more attractive to a producer looking to market smaller groups of animals several months apart. The premiums that producers pay are subsidized, making these products more affordable for smaller producers. Additionally, unlike futures and options, LRP premiums are paid when the coverage ends, negating the need for upfront capital costs. For fed cattle and feeder cattle, the coverage is available from 13 to 52 weeks from the anticipated time that animals will be marketed. Until recently, coverage for swine was only available from 13 to 26 weeks, limiting its usefulness to many operations that may have expanded up the supply chain. LRP is a national program and operates based on a national price, meaning that it does not take basis into account. An individual producer could have experienced a price below the covered price level, but if the national price used in the calculation of the ending price is above that covered price level, the producer does not receive an indemnity.
Changes to LRP
USDA’s recently implemented improvements to LRP make these policies more usable and affordable for livestock producers. In addition to the changes announced on January 19, an adjustment made in late 2020 increased the premium subsidy for coverage levels, as shown in Figure 1.
Another key change increased pork producers’ ability to manage their risk by extending the endorsement lengths for LRP-Swine to 52 weeks, bringing them in line with LRP’s fed cattle and feeder cattle products. Another helpful change was an extension of the amount of time from the end of the endorsement that a producer was required to own the covered animals. The previously required 30-days potentially limited a producer who needed to move up marketing dates due to adverse conditions. RMA has now extended that window to 60 days from the end of the endorsement. Another positive change means that producers don’t have to wait until their calves hit the ground; the new changes have created new feeder cattle and swine types to allow for unborn livestock to be insured. Finally, RMA increased the livestock head limits for individual endorsements, as well as for annual coverage. Figure 2 shows that feeder and fed cattle limits are now 6,000 per endorsement and 12,000 annually and swine limits are now 40,000 head per endorsement and 150,000 head annually.
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 increasing the number of animal limits, increasing premium subsidies to assist producers and extending the length of endorsements for their swine products.