Livestock Risk Protection has often sparked the interest of cow-calf producers and smaller cattle feeders looking for a cost-effective way to transfer downside price risk to others, wrote Matthew Diersen, risk and business management specialist at South Dakota State University, in a Livestock Marketing Information Center letter called In The Cattle Markets.
A few years ago, the premium subsidy on LRP was substantially increased and the effect on LRP sales was dramatic, he said.
LRP GROWTH
In fiscal year 2020, fewer than 80,000 head were covered as feeder cattle, he said. In fiscal year 2023 almost 4.2 million feeder cattle were covered.
In fiscal year 2019 fewer than 4,000 head were covered as fed cattle, he said. By fiscal year 2023, there were more than 850,000 fed cattle covered.
A LITTLE PERSPECTIVE
For perspective, the 2022 US calf crop was 34.5 million head, Diersen said. Thus, the share covered is growing, but nothing like the shares of corn or wheat acres insured.
There still were only 19,259 policies sold for feeder cattle and 6,768 policies sold for fed cattle in 2023, he said.
The 2017 Census of Agriculture reported 729,046 operations had beef cows, Diersen said. During 2022, the 26,000 feedlots marketed 25.9 million head of finished cattle.
With the sharp increases in head covered, the liability (or insured amount) also increased, he said. During fiscal year 2023, the value of feeder cattle covered was almost $7 billion, and the value of fed cattle covered was almost $2 billion.
A HIGHER SUBSIDY
The sharply higher subsidy on LRP premiums was the primary driver of the increase in sales and coverage, Diersen said. Hedges using futures would require margin deposits, so the increase in futures prices would have been seen as higher margin calls at higher interest rates.
Hedges using put options also would be more expensive at the time of purchase as they are not subsidized, he said. In addition, option premiums are paid up-front while LRP premiums are paid for at the end of the coverage period.
Higher interest rates also can effectively reduce the cost of LRP relative to using put options, Diersen said.
The LRP subsidy is the highest for the lowest levels of coverage, he said. Before the subsidy increase, the ratio of the total premium to total liability for feeder cattle coverage was 0.03. Last year the ratio was 0.04.
The subsidy combined across fed and feeder cattle in 2023 was more than $110 million. Producers paid about twice that amount for the coverage.
The market, during most of that time, steadily increased the cattle price levels, Diersen said. Thus, the indemnity payments were low for feeder cattle and zero for fed cattle.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $182.00 per cwt to $183.67, compared with last week’s range of $182.69 to $187.04 per cwt. FOB dressed steers, and heifers went for $287.53 per cwt to $289.85, compared with $286.98 to $292.34.
The USDA choice cutout Tuesday was down $2.36 per cwt at $301.06 while select was off $1.35 at $276.15. The choice/select spread narrowed to $24.91 from $25.92 with 159 loads of fabricated product and 58 loads of trimmings and grinds sold into the spot market.
The USDA said basis bids for corn from feeders in the Southern Plains were down $0.05 to $0.05 at $1.30 to $1.45 a bushel over the Dec corn contract, which settled at $4.85 1/2 a bushel, down $0.02 3/4.
No live cattle contracts were posted for delivery Tuesday.
The CME Feeder Cattle Index for the seven days ended Monday was $250.26 per cwt, up $0.56. This compares with
Tuesday’s Oct contract settlement of $247.95, up $1.05.