What is in this article?:
- Livestock producers have risk management options
- Price risk management
- The Pasture, Rangeland and Forage (PRF) program protects livestock producers from losses to productivity caused by poor forage conditions.
- The decision to purchase PRF must be based on an analysis between the historical results as compared to a producer’s results.
- The Livestock Risk Protection (LRP) program and the Livestock Gross Margin (LGM) program both protect against price fluctuations.
Price risk management
The LRP is owned and maintained by Applied Analytics Group, Murphy explained, and insures against price declines for fed and feeder cattle. It does not consider casualty or death losses.
“Actual ending values are based on weighted average prices as reported in the Chicago Mercantile Exchange Group Feeder Cattle Index.”
Length of coverage may be 13, 17, 21, 26, 30, 34, 39, 43, 47 or 52 weeks. Producers may select coverage ranging from 70 percent to 100 percent of the expected ending value.
“If the ending value is below the coverage price, the producer will be paid an indemnity for the difference between the coverage price and the actual ending value.”
Murphy said the LGM program is owned and maintained by Iowa Agricultural insurance Innovations LLC.
“LGM is a bundled option of Chicago Mercantile Exchange contracts that covers both livestock price and feed costs (Asian Option),” he said. Coverage includes lean hogs, cattle and dairy cattle.
“For cattle, LGM protects against loss of gross margin—market value of livestock minus feeder cattle and feed costs,” he explained.
“Indemnity at the end of 11-month insurance period is the difference, if positive, between gross margin guarantee and actual gross margin. It does not insure against loss due to death or damage to cattle.”
The program uses futures prices to determine expected gross margins and the actual gross margin. “The producer’s actual price is not used,” Murphy said. The price the producer receives at the local market is not used in any calculations.
“Policies are sold on the last business Friday of the month until 8 p.m. Central Standard Time the following day. Producers can sign up for LGM twelve times per year and insure all the cattle they expect to market over a rolling 11-month insurance period,” Murphy said. “The policy can be tailored to any size farm.”
LGM is an alternative to producers buying options on their own. “Options cover fixed amounts of commodities and those amounts may be too large to be used in the risk management portfolio of some farms,” Murphy said.
The program is available in Texas, Oklahoma, Kansas and several mostly Midwestern states.