OMAHA (DTN) -- One of the biggest underlying stories of 2023 was how livestock producers embraced Livestock Risk Protection policies.
Livestock Risk Protection (LRP) has become a popular risk-management option for producers. The policies are set up to reduce losses from price declines. As prices were dropping in the fall, the policies appear to have been salvation for producers.
LRP policies go back 20 years: USDA's Risk Management Agency (RMA) increased the premium subsidies in 2019 and continued to adjust them in 2020, creating tiered rates based on coverage levels. Policies can range from 70% to 100% with the premium subsidies at 55% for policies up to 79% protection levels, and subsidies declining to 25% for the 95%-and-higher coverage levels.
Producers can cover up to 12,000 head a year, and they can purchase LRP contracts for both feeder cattle and fed cattle. Coverage periods can stretch from as little as 13 weeks to as long as 52 weeks. Producers also must indicate their ownership interests in the cattle that are covered.
LRP operates like hedging, so producers need a handle on how that works. Unlike crop insurance, contracts actually change daily. Prices for new contracts are posted in the late afternoons on weekdays and available until 8:25 a.m. Central Time the next day.
At the end of a policy, an indemnity is generated if the regional/national cash price average is below the insured coverage price. If the cattle are sold more than 60 days before the end of the contract date, producers cannot collect an indemnity or get their premium back unless their share of the cattle is properly transferred.
USDA Risk Management Agency (RMA) data on livestock policies isn't as detailed as crop insurance, but RMA shows livestock policies have jumped from 7,000 policies in 2021 and $14 billion in liability, to more than 16,300 for this year with liability covered at $26.45 billion.
Producers in 2023 focused more heavily on feeder cattle contracts than fed cattle:
-- Feeder cattle insurance contracts: 19,249 policies covering 4.2 million head through Dec. 15, more than twice the total number of feeder cattle covered in 2022.
-- Fed cattle insurance contracts: 6,760 fed cattle policies involving 858,165 cattle, through Dec. 15, up more than 263,400 head from 2022.
Already, producers are lining up in even greater volumes for 2024 policies.
More than 21,000 feeder cattle policies are sold for 2024 covering nearly 2 million head.
More than 8,850 fed cattle policies are sold for 2024 covering 736,600 cattle.
SWINE
Despite all the focus on cattle, swine producers also use LRP, though in smaller volumes. Still, 1,555 policies in 2023 covered 36.5 million hogs. They generated $346 million in indemnity payments, 219% higher than the payout in 2022.
Expect to see more focus on LRP and other livestock insurance policies in the coming years.
FALLING PRICES LED TO QUESTIONS
As DTN Lead Analyst Todd Hultman explained, as live and feeder cattle prices fell on the CME, questions were raised about the role of LRP. "So far, there has been no evidence of a cash flow problem among LRP providers, and it may help to know the LRP program falls under the jurisdiction of the Federal Crop Insurance Corporation and premiums are subsidized by USDA's Risk Management Agency," Hultman explained.
WEANED CALF RISK PROTECTION
RMA also is setting up more policy options for producers. Weaned Calf Risk Protection will be available to livestock producers in four states beginning in 2024.
The policy is part of the USDA's Risk Management Agency (RMA) program that offers Actual Production History (APH) coverage for beef producers to insure revenue from spring calving operations.
This program becomes available to cow-calf producers in the states of Colorado, Nebraska, South Dakota and Texas. Coverage levels between 50% and 85% will be available, as well as catastrophic coverage. The sales closing date for these policies is Jan. 31, 2024.
Prices under Weaned Calf Risk Protection will be set using: (1) USDA Agricultural Marketing Service (AMS) auction price data for the 23 price-determining states to produce a regional-weighted average price series for cattle between 200 and 750 pounds; and (2) Chicago Mercantile Exchange prices for feeder cattle.
The AMS price will consist of daily auction data compiled into weighted average monthly prices for the two respective regions included in this new coverage.
Texas falls into the South-Central region. Colorado, Nebraska and South Dakota fall into the North-Central region.
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