For livestock producers not comfortable with the futures market, the USDA has Livestock Risk Protection insurance, meant to ensure a bottom-line price for a specified period of time.
LRP-feeder cattle, for instance, is a federally backed product that provides protection against prices falling below the target level of the policy at the expiration date.
Similar protection may be gained through the purchase of put options, but there are differences that can make one or the other more attractive to an individual producer. However, the USDA subsidizes premium costs, so premiums may be cheaper than put options, said a New Mexico insurance agent.
A web posting by Art Barnaby Kansas State University agricultural economist, the two can be differentiated by saying “a CME put option is an option on the underlying futures contract,” while “LRP is an option on the CME feeder cattle cash index price.” Feeder cattle producers may feel more comfortable with dealing with the CME index since it deals with the cash market rather than minute-to-minute perceptions of what cash prices might be in the future.
The USDA provides various calculators to figure the premium on various feeder cattle that factor in things like numbers, weights, targeted end weights and targeted values. Premiums will vary depending on all the factors involved.
Some insurance agents also may have developed their own computer programs to help calculate costs versus benefits.
PURCHASING LRP-FEEDER CATTLE
Thebalancecareers.com said in a web posting that livestock insurance agents provide insurance policies to cover the animals owned by their clients.
The New Mexico agent emphasized that owning the livestock is required. There’s no speculation here.
Policies are available for a variety of coverage options “including specific high-value animals, blanket coverage for property and animals and herd coverage, which is the most common option and ensures a designated number of animals of a particular type,” Thebalancecareers said.
Agents may specialize in one type of livestock insurance or have other types, even down to pet insurance.
Unlike futures market contracts, LRP insurance can be customized to meet the needs of individual producers, so odd numbers of animals (feeder cattle, for instance) can be insured. Coverage can be chosen ranging from 70% to 100% of the expected ending value.
“At the end of the insurance period, if the actual ending value is below the coverage price, you will be paid an indemnity for the difference between the coverage price and actual ending value,” the USDA said in a web posting.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $139.74 to $140.12 per cwt, compared with last week’s range of $138.00 to $140.00. FOB dressed steers, and heifers went for $217.90 to $218.31 per cwt, versus $216.58 to $221.36.
The USDA choice cutout Monday was up $0.90 per cwt at $268.04, while select was down $0.82 at $261.70. The choice/select spread widened to $6.34 from $4.62 with 50 loads of fabricated product and 12 loads of trimmings and grinds sold into the spot market.
The USDA reported that basis bids for corn from feeders in the Southern Plains were steady to down $0.05 at $1.40 to $1.55 a bushel over the May futures and for southwest Kansas were unchanged. May settled at $7.50 1/2 a bushel, up $0.15 1/2.
No live cattle contracts were tendered for delivery Monday.
The CME Feeder Cattle Index for the seven days ended Friday was $156.15 per cwt up $0.10. This compares with Monday’s Apr contract settlement $158.37, down $3.20.