University of Missouri Extension

G459, New March 2014

Livestock Risk Protection (LRP) Insurance in Missouri

Ryan Milhollin
Agricultural Economist
Commercial Agriculture Program
Ray Massey
Extension Professor
Commercial Agriculture Program
Bryce Bock
Student Assistant
Commercial Agriculture Program

Livestock risk protection (LRP) insurance offers livestock producers a way to manage risk associated with market price volatility (see Figure 1 for feeder cattle future prices). It does not protect against other perils such as disease or death. The U.S. Department of Agriculture’s (USDA) Risk Management Agency (RMA) administers LRP insurance products. It is sold by approved livestock insurance agents throughout the year, and LRP premiums are subsidized by the federal government. Policies are available in Missouri for feeder cattle, fed cattle, lamb and swine.

Nearby feeder cattle futures
Figure 1
Nearby feeder cattle futures (2010–2013) demonstrate that price volatility can present a challenge for livestock producers.

How LRP insurance works

A livestock producer must find an agent who is authorized to sell LRP insurance. The producer must fill out a one-time application to determine eligibility for LRP insurance. Once the application is accepted by the RMA, the producer may begin the process of purchasing a specific coverage endorsement (SCE).
An SCE requires specific information regarding the livestock to be insured:

Producers indicate the type of animal to be covered and estimate their weights at the end of the coverage. For feeder cattle, breed and sex characteristics must be identified. The length of the available endorsement will range from 13 to 52 weeks based on the animal species involved. The coverage level is a percentage of the livestock’s expected value at a contract’s expiration date, and premiums increase with the level of coverage. Producers must also indicate their level of ownership (must be greater than 10 percent) and adjust the coverage accordingly. After submitting the SCE, the premium is due on the day it is accepted by the RMA. 

Feeder cattle, fed cattle and swine policies can be normally bought on any weekday, excluding holidays. However, lamb policies can only be purchased on Mondays (a holiday will push them to the following day). The time frame for purchase starts at 3:30 p.m. and lasts until 9 the next morning, Central time. Keep in mind coverage and prices are determined daily by a series of data sets and calculators on the RMA website. If one or more of these elements are unavailable, producers will be unable to purchase LRP insurance for at least that day, if not longer. The RMA also reserves the right to suspend sales at any time due to market or funding limitations.

Premiums

Premiums are calculated in a multistep process detailed in Figure 2. Actuarial rates depend on the coverage price and endorsement length selected.

Feeder cattle, fed cattle and swine have a 13 percent subsidy level. Lamb subsidy percent levels vary by endorsement length:


Figure 2
LRP premium calculations.

Indemnity

Indemnities are paid at the end of the insurance period based on the difference between the actual ending value and the coverage price selected by the producer. If the actual ending value is higher than the coverage price, no indemnity will be paid.  Note that the target ending weight in this calculation is in hundredweight (cwt). To collect the indemnity, a claim form must be submitted within 60 days of the policy’s end date. Payments will be made within 60 days of a properly filed claim (Figure 3).

If the livestock is sold more than 30 days before the contract end date, producers cannot receive an indemnity and they do not get the premium payment back unless their share is properly transferred. Any animals that die during the coverage period should be reported within 72 hours to avoid reducing the endorsement. 


Figure 3
indemnity calculation.

Feeder cattle policy

LRP insurance for feeder cattle can provide coverage for calves, steers, heifers, predominantly Brahman or predominantly dairy cattle (Table 1). Ending weights can be either under 600 pounds or between 600 and 900 pounds. Feeder cattle can be insured for 13, 17, 21, 26, 30, 34, 39, 43, 47 or 52 weeks. Only 1,000 head of feeder cattle can be insured under a single SCE, and only 2,000 head per crop year (July 1–June 30). To determine the feeder cattle price values used in the policy, LRP insurance uses the CME feeder cattle index. Based on the type of cattle and ending weights, a price adjustment factor (Table 2) is used to calculate the coverage price and ending values from the CME feeder cattle index.

Table 1
LRP feeder cattle snapshot.

Type of cattle Calves, steers, heifers, Brahman or dairy
Selling weights Under 600 lbs. or 600–900 lbs.
Coverage period 13–52 weeks
Coverage level 70–100%
Ending value base CME feeder cattle index
Maximum per SCE 1,000 head
Maximum per year 2,000 head

Table 2
Price adjustment factors for feeder cattle.

Weight range Steers Heifers Brahmah Dairy
Under 600 lbs. 110% 100% 100% 85%

600–900 lbs.

100% 90% 90% 80%

Fed cattle policy

A fed cattle policy is fairly similar to a feeder cattle policy. Steers and heifers expected to finish select or higher quality grade and yield grade one to three are insurable (Table 3). Insured fed cattle must weigh between 1,000 and 1,400 pounds when marketed for slaughter at the end of the insurance period. Fed cattle can be insured for 13, 17, 21, 26, 30, 34, 39, 43, 47 or 52 weeks. Fed cattle producers can select a price coverage level from 70 to 100 percent of the expected ending value. This policy can insure 2,000 head under a single SCE, and a total of 4,000 head per crop year. The fed cattle price values in the policy are determined by a five area weekly weighted average direct slaughter cattle for steers that grade 35 to 65 percent choice as calculated by the USDA Agricultural Marketing Service.

Table 3
LRP fed cattle snapshot.

Type of cattle Any heifers or steers
Selling weights 1,000–1,400 lbs.
Coverage period 13–52 weeks
Coverage level 70–100%
Ending value base Five area weekly weighted average direct slaughter cattle, steers, 35–65% choice
Maximum per SCE 2,000 head
Maximum per year 4,000 head

Swine policy

LRP swine policies allow producers to insure market hogs (barrows and gilts) as detailed in Table 4. Target weight requirements dictate that swine under LRP coverage must weigh between 150 and 225 pounds on a lean (dressed weight) basis. To convert from live weight, use the lean conversion factor of 0.74 to adjust to dressed weights. This adjustment would reflect live weights of between 203 and 304 pounds. Swine can be insured for 13, 17, 21 or 26 weeks. Swine producers can select a coverage level of 70 to 100 percent of the expected ending value. Contract and yearly limits state that 10,000 head can be covered under a single SCE, and 32,000 head can be insured during one crop year. Swine price values are determined by the CME lean hog index.

Table 4
LRP swine snapshot.

Type of swine Barrows and gilts
Selling weights 203–304 lbs. (live)
150–225 lbs. (lean)
Coverage period 13, 17, 21 or 26 weeks
Coverage level 70–100%
Ending value base CME lean hog index
Maximum per SCE 10,000 head
Maximum per year 32,000 head

Lamb policy

Feeder or slaughter lambs are insurable under LRP (Table 5). Weight requirements dictate that lambs should weigh between 50 and 150 pounds at the end of the coverage period. Lambs can be insured for 13, 20, 26 or 39 weeks, and lamb producers can select a coverage level between 80 and 95 percent. Livestock limits state that a maximum of 2,000 head can be covered per SCE, and 28,000 head per crop year. The calculated formula live price is based on the national weekly average lamb price as reported by the USDA.

Table 5
LRP lamb snapshot.

Type of lambs Feeder or slaughter lambs
Selling weights 50–150 lbs.
Coverage period 13, 20, 26 or 39 weeks
Coverage level 80–95%
Ending value base Calculated formula live price
Maximum per SCE 2,000 head
Maximum per year 28,000 head

LRP example

A producer in Missouri plans to sell 100 feeder cattle (steers) at a target ending weight of 750 pounds and owns 100 percent of the cattle. The expected ending value is $170 per hundredweight, and the producer wishes to elect a coverage level of 97 percent. The price adjustment factor is 100 percent for steers, so the coverage price is $165 per hundredweight ($170 × 100 percent × 97 percent). An actuarial rate of 0.015996 is associated with this coverage plan.

Premium calculation

  1. 100 cattle × 7.5 cwt = 750 cwt
  2. 750 cwt × $165 coverage price = $123,750
  3. $123,750 × 100% ownership share (1.0) = $123,750 insured value
  4. $123,750 × 0.015996 actuarial rate = $1,980 total premium
  5. $1,980 premium − ($1,980 premium × 13% subsidy rate) = $1,723 farmer paid premium, or $2.30 per cwt

Indemnity calculation

Using the same information in the above example, let’s say that at the end of the 21 weeks, the actual ending value for feeder cattle is $150 per hundredweight.

  1. $165 coverage price – $150 actual ending value = $15 per cwt difference

The difference must then be multiplied by the total hundredweight to determine the indemnity payment owed to the producer.

  1. $15 per cwt difference × 100 cattle × 7.5 target cwt × 100% share = $11,250 indemnity

Remember that the producer had to pay a premium, which means the indemnity received does not fully represent the gain or loss from purchasing the plan.  The difference between the indemnity and premium needs to be calculated to find out the net gain or loss from the LRP plan.

  1. $11,250 indemnity – $1,723 farmer premium = $9,527, or $12.70 per cwt, net gain from LRP plan

Advantages of LRP

LRP insurance provides protection against low market prices that could affect a farmer’s ability to obtain a positive return. It performs similarly to a put option in the futures market in that it protects downside price risk. But LRP insurance offers many advantages over put options. It is simple to purchase and requires no broker commissions or margin calls. With put options, producers must contract in large increments of livestock. These increments can prove too large for smaller producers, and bigger producers run the risk of either under- or over-insuring livestock. LRP insurance allows producers to choose the exact number of livestock they wish to cover, within maximum head limitations per endorsement and per year.

Small beef producers can benefit from LRPFigure 4
Small beef producers can benefit from LRP by insuring the exact number of head they have on their operation.
 

Disadvantages of LRP

One disadvantage of LRP insurance is that the actual ending value is simply based on indexes and other data sets. Ending prices may be different than the price a producer actually receives when selling livestock. Basis risk exists, and producers need to understand their local market.

Other disadvantages relate to a lack of flexibility and the occasional unavailability of LRP policies. Funding limitations may lead the USDA to suspend policy sales at any given point in the year. Once LRP policies are entered, producers are locked into coverage and selling timelines. Occasionally, the desired coverage options will be unavailable for purchase on a given day, or the only available choices may be at an unwanted coverage level or endorsement length. In that case, a producer would have to wait until a later date to purchase the insurance, potentially leading to major scheduling issues.

For more information

Please contact a livestock insurance agent who can provide further information and help you find a policy best suited to your operation. These resources include more information about LRP policies, as well as a way to find a nearby livestock agent:

The guide is for educational purposes only. The information in this guide does not replace or supersede any procedures or modify any provisions contained in the complete insurance policies.

 

G459 Livestock Risk Protection (LRP) Insurance in Missouri | University of Missouri Extension

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