Introduction

Feeder calf and fed cattle prices are currently high, as are the input costs to raise them. Price volatility has increased over the past decade and external factors such as trade disruptions or media reports of health scares can quickly cause prices to drop. Beef producers are taking on significant risk. To help mitigate that price risk, beef producers can consider using Livestock Risk Protection Insurance (LRP) to protect against unforeseen price drops.

What is LRP (Livestock Risk Protection) Insurance?

LRP is an insurance policy from USDA that can be used to implement a price floor, similarly to a put option, while still allowing the opportunity to capture higher prices should they occur. One advantage of LRP over buying a put option is that LRP covers the actual number of animals a producer has in a group, rather than being confined to futures market contract sizes of 40,000 pounds of live cattle or 50,000 pounds of feeder cattle. Additionally, the LRP premium is subsidized. The policy does not cover poor animal performance or animal death. It only protects against unforeseen price drops.

LRP coverage options

LRP coverage is available for different cattle types, including unborn calves, feeder cattle less than 600 pounds, feeder cattle over 600 pounds, and fed cattle. Feeder cattle that are on the ground at the time of the policy endorsement being purchased will need separate endorsements for steers and heifers, whereas unborn calves are assumed to be 50% steers and heifers. This coverage for feeder cattle is also specific for beef type, i.e., predominantly dairy type or Brahma type cattle. Producers can select coverage lengths ranging from 13 to 52 weeks, and coverage rates can be chosen from 70 to 100 percent of the expected ending value. Coverage for fed cattle does not differentiate between sex or breed type.

Recent changes to LRP

There have been several changes in the last few years to make LRP more favorable for farmers to use. Some of these changes are as follows:

• Increased subsidy levels from the original 13 percent subsidy to 35 to 55 percent, depending on the percent of the expected ending price a producer wants to insure.
• Changing the premium due date to the end of the coverage period rather than the beginning.
• Expanding the sale window from 30 days to 60 days prior to the ending coverage. Cattle can be sold up to 60 days prior to the ending coverage date without affecting coverage of the policy purchased.

LRP coverage prices

The coverage prices are determined daily from the expected ending price based on Chicago Mercantile Exchange (CME) feeder cattle or fed cattle contracts and the coverage level chosen. The ending reference price is determined from the CME feeder cattle index price, which is an index of feeder cattle prices at auctions in twelve states, or the 5 Area weekly weighted average direct slaughter cattle price. While Wisconsin prices are not included in those calculations, Wisconsin feeder and fed cattle prices react similarly to those prices. For example, if feeder cattle prices drop in the 12 states used to determine the feeder cattle index price or in the five states used for the slaughter price, then Wisconsin prices typically drop similarly.

Let’s look at an example to get an idea of how LRP works.

LRP example

Cattle feeder Betsy purchased 40 head of 500-pound beef x dairy cross steers in late September 2024. She has also submitted the paperwork and is approved to purchase specific coverage endorsements.

From experience, she knows that these cattle will be finished and ready to sell in 280 to 300 days (about 40 weeks). On September 27, she saw the expected ending price for fed cattle at 39 weeks is $180.58 per hundred weight, and decided to insure coverage at the 99% coverage level ($178.77 per hundred weight) for a premium cost of $5.68 per hundred weight. This coverage level puts in a net floor on the cattle at $173.09 per hundred weight (subtracting the premium from the chosen coverage level) if the market drops due to unforeseen circumstances. The ending date for the coverage is June 27, 2025.

Looking ahead, after the ending date has passed, Risk Management Agency (RMA) will determine an actual end value for June 27, 2025 from the July 27, 2025 report titled “5 Area Weekly Weighted Average Direct Slaughter Cattle”. If the actual ending value is less than $178.77, an indemnity payment would be made for the difference between the coverage price of $178.77 and the actual ending value. Betsy will have to pay the premium at the conclusion of the coverage whether an indemnity payment is made or not.

As Betsy purchases additional groups of feeder cattle to fill pens at her farm, she can purchase separate specific coverage endorsements for those groups based on when she expects to market them but is not obligated to do so.

Conclusion

Like most insurance, cattle producers should not purchase LRP hoping to collect on it. It is intended to help protect producers against unforeseen price drops that could occur for many reasons.

When used as a regular part of a market risk management plan, LRP insurance can help protect profits in years where markets take unforeseen downturns, which is difficult to predict. The recent changes to the program have made LRP insurance more appealing to cattle producers. LRP insurance is a safety net, reducing downside price risk by providing a floor using national price expectations, while also allowing producers to take advantage of higher national prices if they occur.

Check with your crop insurance agent to see if they also carry LRP insurance. A listing of agents and additional information about LRP can be found at the following links: 

https://www.rma.usda.gov/tools-reports/agent-locator

https://www.rma.usda.gov/en/Fact-Sheets/National-Fact-Sheets/Livestock-Risk-Protection-Feeder-Cattle

https://www.rma.usda.gov/en/Fact-Sheets/National-Fact-Sheets/Livestock-Risk-Protection-Fed-Cattle

A YouTube video giving an overview of LRP https://youtu.be/KG6NOOVFGM0

Reviewer

Kimberly Kester
Regional Livestock Educator
 University of Wisconsin-Madison Division of Extension

Authors

 

William Halfman

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Brenda Boetel

Brenda Boetel is an Extension Agricultural Marketing Specialist for the University of Wisconsin. Her teaching program and extension research provides leadership in educational programming for problems facing the livestock/meat and corn/soybean industries. She teaches classes at UWRF on price risk management, has authored articles on livestock issues and been interviewed by high impact outlets, including the US Farm Report.

Articles by Brenda Boetel

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