Livestock Risk Livestock Risk Protection (LRP)Protection (LRP)

A New Price Risk Management Tool for Livestock Producers

Tim Petry, Livestock Economist

01-28-10LRP – Cattle Feedlot School – Jan2011

LRPLRP• Insures against price declines• Similar to put options• 13% of premium is subsidized• Crop insurance agents do not have to offer• List of approved agents at:

www3.rma.usda.gov/apps/agents/index.cfm

Livestock Price and Production Patterns1. Seasonal2. Cycle

3. Long term4. Unexpected

LRPLRP

• Feeder Cattle (beef, dairy, Brahman)– Under 600 lbs• Steers or heifers

– 600-900 lbs• Steers or heifers

• Fed cattle• Hogs• Lambs

LRP – Feeder CattleLRP – Feeder Cattle

• Based on Chicago Mercantile Exchange (CME) feeder cattle price index which is available at www.cmegroup.com

• 650-849 lb, M & L # 1, feeder steers at markets reported by USDA-AMS

• Same “basis” considerations as futures and options

CME Feeder Cattle IndexCME Feeder Cattle Index

85

90

95

100

105

110

115

120

125

130

9/1/

0511

/1/0

51/

1/06

3/1/

065/

1/06

7/1/

069/

1/06

11/1

/06

1/1/

073/

1/07

5/1/

077/

1/07

9/1/

0711

/1/0

71/

1/08

3/1/

085/

1/08

7/1/

089/

1/08

11/1

/08

1/1/

093/

1/09

5/1/

097/

1/09

9/1/

0911

/1/0

91/

1/10

3/1/

105/

1/10

7/1/

109/

1/10

11/1

/10

1/1/

11

16%

21% 19%

22% 10%

?

CME Index and LRPCME Index and LRP

Index: par for over 600 steer, under 600 heifer, under 600 Brahman+ 10% for under 600 steer- 10% for over 600 heifer, over 600

Brahman- 15% under 600 dairy- 20% over 600 dairy

N.D. Feeder Cattle BasisN.D. Feeder Cattle Basis“Rule of Thumb”

• E to W along I-94

• Highway 2 deduct $2 to $4700 – 800 = par -4 to +4600 – 700 = +5500 – 600 = +15400 – 500 = +20800 – 900 = -5

Insurance PeriodInsurance PeriodPolicies may be available for the following weekly lengths:

13, 17, 21, 26, 30, 34, 39, 43, 47, 52

Policy SizePolicy Size Any # up to 1,000 head per Specific Coverage

Endorsement (SCE) 2,000 maximum per year (July 1–June 30)

ActuarialsActuarialsCoverage prices & rates change daily and are posted on the USDA Risk Management Agency (RMA) web site

www3.rma.usda.gov/apps/livestock_reports/main.aspx

Coverage levels will range from 70-100% of expected price

IndemnityIndemnity

Payment based on difference between COVERAGE PRICE (CP) & CME CASH SETTLEMENT PRICE (CS)

CP = $105/cwtCS = $100 $5/cwt payment

Producers must submit 04-LRP-Claim Form within 60 days of end of contract

Fall Steer Calf LRP ResultsFall Steer Calf LRP ResultsJuly 15 to

YearCoverage

Price Premium Actual PriceLRP

Payment LRP Profit

2007 125.38 2.68 124.06 1.32 -1.36

2008 120.52 2.79 107.57 12.95 10.16

2009 112.22 3.03 102.58 9.64 6.61

2010 121.04 2.36 118.23 2.81 .45

Oct 15 (13 wk)

YearCoverage

Price Premium Actual PriceLRP

Payment LRP Profit

2007 123.20 2.58 119.27 3.93 1.35

2008 127.38 5.46 107.37 20.01 14.55

2009 112.18 3.73 102.94 9.24 5.51

2010 121.02 2.88 122.61 -- -2.88

Nov 15 (17 wk)

SF_LS766Sioux Falls, SD Thu Nov 18, 2010 USDA-ND Dept Ag Market News Stockmens Livestock Exchange - Dickinson, NDFeeder Cattle Weighted Average Report for 11/18/2010 Receipts: 4601 Last Week: 3650 Year Ago: 3936 Compared to last week: Steers calves traded 2.00 to 4.00 higher. Heifer calves traded steady to 3.00 higher. Demand was good with active trading. Steers made up 55 percent. Heifers made up 44 percent. Feeder bulls made up 1 percent. 52 percent over 600 lbs. Next sale is scheduled for December 2, 2010. Feeder Steers Medium and Large 1 Head Wt Range Avg Wt Price Range Avg Price 11 328-330 329 143.00-144.00 143.54 11 373-386 378 147.00-147.75 147.47 52 419-440 433 142.50-148.50 145.27 113 452-499 467 134.50-140.75 138.28 158 506-544 533 126.50-135.50 130.22 115 509-527 521 136.25-138.25 136.92 Fancy 145 559-599 582 117.75-127.75 122.50 30 561 561 132.00 132.00 Fancy 579 600-648 630 114.00-122.75 119.27 Calves 199 651-695 675 113.50-119.00 116.68 Calves 14 658 658 124.00 124.00 Fancy 250 700-739 715 112.00-118.25 114.74 Calves

Backgrounding Steer LRP ResultsBackgrounding Steer LRP ResultsAug 25 to Jan 20 (21 wk)

YearCoverage

Price PremiumActual Price

LRP Payment

LRP Profit

2007-08 116.05 3.70 97.16 18.89 15.19

2008-09 106.01 3.23 95.14 10.87 7.64

2009-10 99.98 2.82 97.46 2.52 -.30

2010-11 116.01 3.56 127.27 0 -3.56

SF_LS796

Sioux Falls, SD Fri Jan 21, 2011 USDA-ND Dept Ag Market News

North Dakota Weekly Auction Summary - For the week ending Jan 21, 2011

Receipts: 9,831 Last Week 13,705 Last Year 16,527

Combined results of 4 auctions this week: Kist, Napoleon, Stockmen’s and West Fargo.

Feeder Steers Medium and Large 1

Head Wt Range Avg Wt Price Range Avg Price

26 368-398 385 162.50-165.50 164.28

47 401-445 433 156.00-167.00 159.48

48 456-488 480 150.00-163.00 154.62

226 501-546 521 143.00-158.75 152.43

339 553-596 576 137.00-149.50 144.11

5 563 563 155.00 155.00 Fancy

638 600-649 625 130.50-145.50 139.07 Calves

769 655-697 681 126.50-138.00 133.54 Calves

526 700-742 718 126.00-134.75 131.08

385 703-746 725 118.00-132.00 128.33 Calves

49 715 715 137.75 137.75 Fancy

15 718 718 137.00 137.00 Value Added

695 750-796 776 121.50-131.00 127.14

30 750-782 771 124.50-127.25 125.47 Calves

659 800-849 820 120.00-126.50 122.80

164 850-898 869 116.00-122.75 119.90

68 904-945 921 115.50-117.25 116.48

Fed Cattle (Steers or Heifers)Fed Cattle (Steers or Heifers)

• 1000 – 1400 lb., Select or higher, YG 1-3• Based on 5-area weighted average 35 to 65 percent

choice steer price– www.ams.usda.gov/mnreports/lm_150.txt

• Released each Monday morning• Any # up to 2000 head per SCE

4000 maximum per year

LM_CT150

St. Joseph, MO Mon Jan 24, 2011 USDA Market News Service

5 AREA WEEKLY WEIGHTED AVERAGE DIRECT SLAUGHTER CATTLE

Texas/Oklahoma/New Mexico; Kansas; Nebraska; Colorado; Iowa/Minnesota feedlots

(Includes all transactions regardless of delivery day)

For: Week Ending Sunday, 1/23/2011

Confirmed: 128,290 Week Ago: 154,806 Year Ago: 133,074

LIVE FOB BASIS - Beef Breeds

Head Weight Price Avg Wtd Avg

count Range Range Weight Price

STEERS

Over 80% Choice 3,395 1,165-1,550 104.00-108.00 1,455 105.79

65 - 80% Choice 10,418 1,225-1,520 104.00-107.50 1,399 105.76

35 - 65% Choice 16,425 1,110-1,450 102.00-107.00 1,314 105.89

0 - 35% Choice 196 1,215-1,325 105.00-106.00 1,248 105.70

Total all grades 30,434 1,110-1,550 102.00-108.00 1,358 105.83

HEIFERS

Over 80% Choice 4,754 1,189-1,425 104.00-106.50 1,326 105.53

65 - 80% Choice 9,980 1,078-1,425 104.00-106.00 1,231 105.81

35 - 65% Choice 16,788 1,050-1,350 102.00-107.00 1,170 105.99

0 - 35% Choice - -

Total all grades 31,522 1,050-1,425 102.00-107.00 1,213 105.87

Cattle LRP TimetableCattle LRP Timetable

MARKETCLASS

MARKETDATE

LRP CONTRACT

13 17 21 26

Under 600 Nov 15 AUG JUL JUN MAY

Over 600 Feb 15 NOV OCT SEP AUG

Fed Jul 15 APR MAR FEB JAN

LRPLRPAdvantages Small numbers can be hedged ↑600, ↓600, heifers, dairy Premium subsidized 13% No brokerage or margin Receive higher prices in bull market Available in months where no futures/options All coverage prices available daily

Disadvantages Not “flexible” like futures and options Must own the livestock 10% rule for calves and heifers

Steps to LRPSteps to LRP

1. Submit eligibility application form with insurance agent

2. Select a SCE (coverage prices and premiums are available after 5 PM (CST) except holidays)1. Number of head2. Policy length closest to marketing date3. Estimated average market weight4. Choose coverage price

3. Pay premium to agent4. Agent submits SCE form electronically (hours are

between 5 PM and 9 AM (CST), Tues-Sat only)

Volatile Prices – Price Risk Management Necessary!Questions?