It’s never a bad time to plan for or to look for cost-effective ways to manage cattle-production risks, said Matthew Diersen, risk and business management specialist at the Ness School of Management and Economics at South Dakota State University, in a message to Extension agents.
In this week’s In The Cattle Markets from the Livestock Marketing Information Center, Diersen said, “Feeder cattle have been under seasonal price pressure, similar to last year, so locking in cattle prices or spending money for insurance may not be a high priority” for producers.
However, Livestock Risk Protection, price coverage sold by insurance agents, is similar to the purchase of put options on cattle futures contracts, he said. LRP is administered by the Risk Management Agency with a federally-subsidized premium that is set to increase soon.
LRP USE FLUCTUATS
Interest in and usage of LRP has fluctuated since first being offered in the early 2000s, Diersen said. Nationally, coverage with the feeder cattle endorsement peaked at more than 300,000 head in marketing year 2014. This was less than 1% of the US calf crop.
Coverage for the most recent marketing year, which ends Sunday, is unlikely to exceed 90,000 head, as demand has fallen with lower prices, he said.
Producers and insurance agents seem pleased with how LRP works, but some expressed disappointment after finding out buying LRP is very similar to buying put options.
PROGRAM CHANGES
In April, the RMA announced several changes to LRP with the 2020 crop year, starting with the premium subsidy, Diersen said. Until now, the subsidy has been small and LRP premiums have been very close to the cost of put option coverage with a brokerage fee.
The subsidy is increasing to 20% 35%, depending on the coverage level, he said. The subsidy applies to the full cost of the coverage, but remains low compared to the subsidy on most crops.
The highest subsidy rate applies to the lowest level of coverage, 70% to 79% of the base price, Diersen said. But at this large deductible, the premium cost is already very low, so an increased subsidy is not likely to look more attractive.
The 20% subsidy applies to the 95% to 100% coverage level, he said. Based on recently available premiums, the higher subsidy will only reduce costs by 30 to 60 cents per cwt.
LRP ADVANTAGES
The main advantage of LRP likely will continue to be the ability to buy coverage on a per-head basis Diersen said.
When using a standard futures or options contract, the size is fixed at 50,000 pounds for feeder cattle, so a producer would need groups of 100 calves weighing 500 pounds to use such contracts efficiently.
With LRP, the same per cwt option cost is the base, but then it is applied per head, effectively reducing the cost when less-than-100-head increments are covered.
CATTLE, BEEF RECAP
Cash cattle trading was reported last week at $110 per cwt on a live basis in the Plains down $2 to $4 from last week, and at $182 to $183 on a dressed basis, down $2 to $3.
The USDA choice cutout Wednesday was up $0.06 per cwt at $219.70, while select was down $0.39 at $198.56. The choice/select spread widened to $21.14 from $20.69 with 113 loads of fabricated product sold into the spot market.
No contract delivery notices were served for the Jun live cattle futures contract Wednesday.
The CME Feeder Cattle index for the seven days ended Tuesday was $131.51 per cwt, up $0.08 from the previous day. This compares with Wednesday’s Aug contract settlement of $135.82, up $4.50.