RISK MANAGEMENT

Federal Livestock Insurance Policies
Livestock Risk Protection
(LRP) Insurance covers the risk of price declines for feeder cattle, fed cattle, swine, and recently lambs. It provides producers an indemnity if a regional or national cash price index falls below an insured coverage price. Similar to a put option, the LRP policy is price insurance only, providing single-peril price risk protection for the future sale of insured livestock.

LRP – Swine: Pork producers submit a one-time application for LRP-Swine coverage. After the application is accepted, Specific Coverage Endorsements (SCE) may be purchased for up to 10,000 head of hogs that are expected to reach market weight near the end of the insurance period. The annual limit for LRP-Swine is 32,000 head per producer for each crop insurance year (July 1 to June 30).  The LRP program could be suspended for several days based on the number of consecutive days with a daily price change equal or exceeding the Daily Price Limit.Pork producers may select from a variety of coverage levels (from 70 to 100 percent of ending value)  and insurance periods  (the length of insurance coverage available for each SCE is 13, 17, 21 or 26 weeks) to correspond with the time their hogs would normally be marketed.            

Examples used are to illustrate the products; not to represent current risk management opportunities.

Example: LRP- Swine
Coverage Expected Coverage Coverage Cost per
Length Price Price Level % cwt*
13 weeks $72.26 $69.56 96.26 $3.04
17 weeks $72.59 $69.89 96.28 $3.45
21 weeks $72.69 $69.99 96.29 $3.70
26 weeks $72.70 $70.00 96.29 $3.85

*Cost reflects 13% subsidy

Projected sales are 100 head marketed in 21 weeks at a carcass weight of 1.85 cwt, with 100% ownership. A 96.29% guarantee is chosen.

Insured value = 100 hd. x $69.99 x 1.85 cwt = $12,948
Premium = 100 hd. x $3.70 x 1.85 = $685

Example result: The final price at the end of the 21 week period is $59.

Actual revenue = 100 hd. X $59 x 1.85 cwt = $10,915
Indemnity payment = $12,948 - $10,915= $2,033

   
Livestock Gross Margin (LGM) Insurance offers protection against a decline in the feeding margin for cattle and swine. An indemnity is paid if the insured gross margin is greater than the total actual gross margin at the end of the insurance period. [The Iowa Farm Bureau Federation and Farm Bureau Mutual Insurance Company helped develop the LGM insurance product.]

LGM – Swine: Pork producers purchase protection against the loss of gross margin (market value of livestock minus feed costs) on swine.  It is based on three risky variables beyond the producer’s control: the price of market hogs, the price of corn, and the price of soybean meal. Coverage is available for three types of operations: Farrow-to-Finish, Segregated Early Weaned (SEW), and Finish.

The indemnity at the end of the 6-month insurance period is the difference, if positive, between the gross margin guarantee and the actual gross margin. The insurance policy uses adjusted futures prices to determine the expected gross margin and the actual gross margin. Adjustments to futures prices are state- and month-specific basis levels. The price the producer receives at the local market is not used in these calculations.

A producer can insure any amount of swine that the producer owns up to a limit of 15,000 head for any 6-month insurance period and a limit of 30,000 head per crop insurance year.

LGM for Swine is sold on the second to last business day of each month. The sales period begins as soon as the Risk Management Agency (RMA) validates the data submitted by the developer after the close of markets on the last day of the price discovery period. The sales period ends at 9:00 AM the following day. If expected gross margins are not available on the RMA website, LGM - Swine will not be offered for sale for that insurance period.

The producer may select deductibles from $0 to $20 per head of swine, in $2 per head increments. 
     
Example: LGM-Swine
1. Finishing Operation
2. Projected sales are 100 head for July
3. Projected gross margin per pig is $60.69 for finishing hogs sold in July.
4. For 100 head, the projected gross margin is $6,069
5. If the producer chooses 100% coverage the guarantee is $6,069 Premium: 100 hd x $7.38 = $738.00
6. Example result: In July, the actual gross margin is calculated as $38.00 per head, or $3,800 for 100 head
7. Since the actual gross margin is less than the guaranteed gross margin, the producer is paid the difference of $6,069 - $3,800 = $2,269

Both Insurance programs allow producers to customize these products to their individual needs and efficiently manage price risk without the use of the futures market. [Neither of these products guarantee a cash price received as the producer's actual cash market selling price is not used to determine indemnities.]
     
If you are interested in purchasing a livestock policy, or just want more information, call Farm Bureau’s Crop Insurance and Risk Management Department at 800-370-3357. Their knowledgeable staff can answer any questions you have and direct you to an agent who is certified to sell livestock insurance coverage.