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By Bryce Myrick
Agricultural Marketing
Education Director
Livestock Risk Protection (LRP) is an insurance policy that offers protection against a decline in hog, feeder cattle or fat cattle prices.
The program is administered by the Risk Management Agency (RMA), part of USDA.
Participating producers pay a premium, just as they would for any insurance policy to cover risk. Producers choose the coverage price, length of coverage and weight of animals, all of which determines the premium. The coverage price is a guarantee or trigger price, and is similar to the strike price of a Put option.
The coverage price is calculated from indexes on the Chicago Mercantile Exchange (CME). Selected futures and Put prices determine the premiums, which change daily.
For feeder cattle, RMA uses the CME Feeder Cattle Index. For fats, RMA uses the "five area weekly weighed average in Direct Slaughter Cattle."
The LRP feeder cattle program is divided into two weight classes—below 600 and 600-900 lbs. There are also classes for heifers, predominantly Brahman, and dairy.
In order to obtain LRP coverage, an application must be completed and submitted to RMA by a licensed crop insurance agent that is qualified to handle LRP.
The two attractive features of the program are:
1) Producers can buy insurance on one to 2,000 head ;
2) RMA subsidizes the premium 13 percent. This gives producers good coverage at a flexible, affordable price. A policy could be structured that would let producers benefit from higher cattle prices while having a predetermined floor price if cattle prices fall.
If you have questions, contact me at 254-715-5055.
