Because no one can predict the future and markets are increasingly volatile, cattle producers are wise to mitigate risk and protect their assets. A program ranchers can use to accomplish this is the Pasture, Rangeland, and Forage (PRF) program discussed by the AgRisk team in the August edition of American Cattlemen. Another practical and valuable way this can be done is by utilizing the U.S. Department of Agriculture’s Livestock Risk Protection (LRP) program, which ensures a price floor on any class of marketable livestock – from embryos to fat cattle – at a set delivery point.
LRP is tailored to the rancher’s own calendar. For example, for those who calve in the spring and then wean and sell their calves in October and November, the offers or floor prices will be based on the CME futures that closest aligns with their planned delivery dates. LRP can be locked in with the shortest contract of 13 weeks and furthest being 52 weeks out.
Another strength LRP offers is the freedom that comes with simple price setting. There’s no stress with checking the weekly markets and second-guessing the best day to take cattle to the sale. With a price floor, there is a guaranteed minimum so more time can be spent focusing on the demands of ranch life.
While higher market values are always a welcome sight to the industry, they are often accompanied by more risk, making protection an even more valuable resource to producers.
“The yearling guys are laying out more cash than ever to stock their places and the cow/calf producers are reaping the benefits of this high market,” explains Aaron Kravig, a Risk Advisor with AgRisk Advisors. “However, with each passing day there is an associated risk that their investments might not be so lucrative when or if this market slides the other way making it even more crucial that both of these producers consider insuring a floor price on their marketable cattle.”
Understanding the Ins and Outs of LRP
LRP has been around since 2003 with daily offers coming directly from the Risk Management Association (RMA) based on the Chicago Mercantile Exchange (CME) feeder board prices. These daily offers, when available, are what the producer uses to lock in that price floor. When the animal goes to market, the cash index is used to settle up. If the cash index ends up being below what producers have locked in with future prices, they are issued a loss check.
Besides being practical, it provides peace of mind, so producers know they will at least break even, regardless of what the market ends up doing on sale day.
“A common objection to the LRP program is the price of the premium,” says Payton Norell, another Risk Advisor. “But when you look at it from a percentage standpoint, the premium costs anywhere from .01% to 4% of the actual price of cattle that you’re locking in. It’s really not very expensive in the gist of things, especially as high as cattle are right now.”
These premiums are also subsidized by USDA at 35-55%, making them even more cost-effective. Plus, they come with no margin calls. This is particularly advantageous in contracts, producers face the possibility of margin calls if the market moves against them, requiring additional funds to maintain their positions.
LRP, however, allows producers to lock in a guaranteed floor price for their cattle without having to deal with these unexpected expenses or monitor daily market fluctuations. This is especially appealing in the current environment, where price swings driven by algorithmic trading can make traditional risk management tools cumbersome and costly.
Kravig agrees, adding, “Oftentimes this premium is comparable, or even less than the price of a traditional option.”
Beef producers of all types, cow-calf operations, stockers and feeders can all benefit with protection that can be purchased daily, with no minimum head counts.
Why Utilize LRP?
With LRP, beef producers become more of a “price maker” than a “price taker.” Many producers sell on the same day every year regardless of what the market is doing and have to settle for the sale barn price that day. No matter whether the market is up or down. By using LRP, they can increase odds of a profitable sale, regardless of where the cash market is trading that day. The upside is always there for the taking. If you sell the cattle for higher, that’s just a cherry on top.
“One of the nice things about the LRP program is it’s by the head, so there is no limit on the bottom side to as few of head of cattle you can lock in making it more attractive option for many smaller producers,” says Kravig.
Norell notes that there are upper limits, on each specific coverage endorsement or SCE, which is 12,000 head per contract, or 25,000 per year.
Premiums don’t come into play until the expiration of the contract. And the different premiums are dependent on the level of contract that is locked in, from 70-100% coverage level.
“At the 100% level, the premium is going to be a little bit higher, but that premium is relatively inexpensive,” explains Kravig.
Another benefit to LRP is that the producer knows their premium on the day they lock in a contract, and can have peace of mind that the cost won’t change.
“With things costing more money now, and the cattle being worth more money, you just need to consider the risk,” says Norell.
With an LRP policy, you can secure a price based on current futures, protecting against unexpected market drops. If the cash index falls below your locked-in price, it triggers a loss.
The classes of cattle or marketable livestock include everything from an unborn calf to a fat steer or heifer ready for harvest. While the program accounts for the variance in cattle types, everything is based on feeder steers and broken down into percentages from there.
[INSERT TWO GRAPHS FOR % DIFFERENCES]
“At the end of these contracts, it is important that we can provide proof of ownership on the cattle that were locked in,” says Kravig. “If there was a loss that triggered an indemnity, proof of ownership is required. That comes in the form of a third-party inspection, such as a brand inspection, a sales receipt, or preg check records from the vet, proving that you had X amount of cows bred, (which) should result in X amount of marketable livestock.”
Getting Started
For cow-calf producers, it is essential to get the best price for calves when they go to market, whether they are sold on the video, by private treaty, or at a sale barn.
“When prices are this high, we know they’re not going to stay there forever,” Kravig explains.
However, for those buying the calves, it is a different story. They are taking a big risk in purchasing stocker calves, sometimes at $1,800 to $2,000, which is much more than what they have paid historically.
Given the high risk Kravig notes that, “You want to have some insurance on your investment.”
To get started with LRP, producers fill out an application, which is free of charge, and then lock in cattle whenever the producer sees a price point they are comfortable with.
“We talk to the producer and figure out what their expectations are for LRP and set them up with a policy that works best for their situation,” says Norell.
Offers come in after the market closes each day and are valid until trading opens the next morning.
“The process is simple, only requiring one signature, and doesn’t take much time,” Kravig added.
The daily rate offers for the LRP are tailored to the needs of each producer. “We cater those to each one of our customers,” Kravig said. Offers range from 13-52 weeks, giving the producer flexibility to decide when and how much of their herd to lock in.
Younger producers in particular are entering the market with greater risks, often leveraging themselves to finance cattle purchases.
“We can also put an endorsement on the cattle for the bank, making the loans more secure and encouraging more willingness to lend,” Kravig notes.
LRP provides an easy-to-use, beneficial tool for producers managing risk. For those in high-leverage positions, especially younger producers, LRP can ensure they have a better chance to recover from potential price drops.
“By locking in through LRP, producers ensure they’ll get their money back out of the loan,” Kravig advises.
Additionally, should there be an indemnity trigger, the bank can secure a first position on the payout, giving it a layer of security while supporting the young producer’s viability.
“For many, it’s a simpler method for locking in prices, without the need for constant monitoring or dealing with margin calls,” Kravig says.
Compared to traditional trading or options, LRP offers a simpler approach without the need to manage large margins or daily trades.
Norell also noted that this simplified model is especially appealing for producers who are timid or overwhelmed by trading on the board.
“It just makes it where you don’t have to be on it every single day,” he says. “Once the price is locked, you know exactly where you stand. It doesn’t matter what happens throughout the contract’s duration. We would encourage every cattle producer to learn more about the LRP program and to look into opening a policy. This doesn’t mean every producer should be locking in contracts but by having a policy in place and receiving the daily rates email you at least have the option to start insuring your marketable cattle when you see offers that you are comfortable with.”
As with the PRF program covered in our previous article, LRP is another valuable tool to make the cattle business less risky. By providing a guaranteed price floor, LRP gives producers the confidence to plan for the future, make informed marketing decisions, and protect their investments against market downturns.
Whether you’re a cow-calf producer, stocker operator, or feeder, LRP offers flexibility, affordability, and peace of mind without the complexity of traditional hedging strategies. AgRisk Advisors is there to help you take advantage of this opportunity and provide the protection you need in an unpredictable market.
Aaron Kravig:
Aaron.Kravig@cropins.net • (719)740-8032
Payton Norell:
Payton.Norell@cropins.net • (970)210-3534