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September 23, 2004 Market Advisor: New Livestock Price Risk Protection Available Oct. 1
The Federal Crop Insurance Corporation (FCIC) has announced that Livestock Risk Protection (LRP) insurance will be available to livestock producers in North and South Dakota, Minnesota and several other livestock producing states beginning Oct. 1, 2004. LRP insurance provides protection from market price declines for feeder cattle, fed cattle and market hogs. LRP insurance functions similar to futures market put options except that the contract is purchased from an approved crop insurance agent rather than a Chicago Mercantile Exchange (CME) futures market broker. The USDA Risk Management Agency (RMA) will publish a list of agents authorized by their companies to write livestock insurance on the RMA Web site: www.rma.usda.gov. Producers interested in LRP need to contact a crop insurance agent and complete an application, which will be submitted through the insurance provider to FCIC for approval. Some insurance companies may elect not to carry livestock insurance, so producers should check with their agent early in the planning process. The LRP contract is market based, so coverage prices and premiums change daily. Producers may select coverage levels between 70 and 95 percent of the posted price, similar to options strike prices. Prices and premiums will be posted daily on the RMA Web site. LRP contracts may be especially useful for small producers because there is no minimum number of livestock that may be hedged. In contrast, CME contracts require 50,000 pounds for feeder cattle; 40,000 pounds for live (fed) cattle; and 40,000 pounds for lean (carcass weight) hogs. Furthermore, the premium is subsidized 13 percent by FCIC. LRP feeder cattle insurance coverage prices are based on the CME feeder cattle contract, which is cash settled to the CME feeder cattle index. It is based on a price series for USDA medium and large frame, number one muscle thickness steers weighing 700 to 849 pounds, and sold in feeder cattle markets reported by the USDA Agricultural Marketing Service (AMS) throughout the United States. LRP uses Price Adjustment Factors (PAFs) to calculate coverage prices for lighter-weight under-600 pound steers, heifers, predominately Brahman and dairy feeder cattle. A limitation of 1,000
head of feeder cattle may be insured under any one Specific Coverage Endorsement
(SCE). The annual maximum number that can be insured during a crop year,
LRP feeder cattle insurance is offered for 13, 17, 21, 26, 30, 34, 39, 43, 47 or 52 week periods. Producers should choose an insurance period closest to the time that cattle reach market weight and are marketed. Theoretically, a 13 week contract purchased on October 1 should be for feeder cattle to be marketed close to Dec. 31. If, at the end of the time period, the CME cash settlement index is below the coverage price, an indemnity equal to the difference is paid to the producer. The actual price received for the cattle has no bearing on the indemnity, so producers still need to market their cattle for the highest possible price. LRP fed cattle insurance coverage prices are based on the 5-area weekly weighted average 35 to 65 percent choice steer price reported by AMS on Monday mornings at www.ams.usda.gov/mnreports/lm_150txt. The same contract time periods as for feeder cattle are available. A limitation of 2,000 head of fed cattle may be insured under any one SCE, with a 4,000 head maximum per crop year. LRP swine insurance coverage prices are based on the CME lean hog index, which is measured by the National Daily Direct Hog Report compiled by AMS. LRP swine insurance is offered for 13, 17, 21 and 26 week time periods. A limitation of 10,000 head of hogs may be insured under any one SCE, with a 32,000 head maximum per crop year. For all LRP contracts, producers cannot have offsetting transactions such as long positions in the futures market or writing put options. Sales of LRP contracts will be suspended if four CME futures contracts trade the daily price limit for two consecutive days. Also, coverage may not be available if underwriting capacity has been expended. For example, LRP trading was suspended after the BSE case was discovered in the United States in late December, 2003. Producers are encouraged to contact their crop insurance agent or the RMA Web site for specific information. ### Source:
Tim Petry, (701) 231-7469, tpetry@ndsuext.nodak.edu |
Market Advisor: |
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North Dakota State University |
