Livestock Risk Protection insurance could become more popular in the wake of 2020
Once upon a time, the cattle markets were considerably stable and no one fathomed they could plummet to incredible lows due to packing plant fires or mystery viruses. Back in those fairy tales days, livestock insurance was usually thought to be unnecessary, but after the events of late 2019 and 2020, it might become the assurance everyone needs just to stay in the cattle industry.
Livestock Risk Protection insurance, through the U.S. Department of Agriculture’s Risk Management Agency, is designed to insure against declining market prices and could become a cattle owner staple with the volatility the beef industry has experienced as of late.
Val Warfield, president of Northwest Commodities in Enid, Oklahoma, explained LRP as a subsidized put option, only producers cannot get out of the contract without forfeiting their premium. Although this aspect of the insurance plan sounds like a negative, from a lender’s perspective, it can actually be a positive and is often looked on favorably as loan collateral. With an LRP policy, cattlemen are also able to customize a plan to meet the needs of their cattle operation.
“There is only one peril for Livestock Risk Protection: a decline in future value of cattle, swine or sheep,” said Warfield. “It’s not going to cover any mortality, it will only cover change in price.”
According to Warfield, LRP was first started in 2000 with a 13% subsidy, eventually it was upped to 20% and recently it increased to 35%. Producers may choose from a variety of coverage levels and insurance periods that match the time cattle would normally be marketed, in addition, ownership may be retained on cattle.
According to USDA RMA, cattlemen may choose coverage prices ranging from 70 to 100% of the expected ending value. At the end of the insurance period, if the actual ending value is below the coverage price, the producer may receive an indemnity payment for the difference between the coverage price and actual ending value.
“LRP is a risk management tool, an insurance policy, a way to protect against catastrophic price declines and establish a floor selling price,” Warfield said. “It is not a speculative product, not designed to enhance profit and is not a guarantee for a cash price receipt.”
The length of insurance coverage available for each specific coverage endorsement is 13, 17, 21, 26, 30, 34, 39, 43, 47, or 52 weeks. Warfield said livestock must be owned at the time insurance attaches and the insurance cannot be bought before the cattle.
“For the cow-calf guys, it used to be that you couldn’t get coverage until the calves were on the ground, there is talk now that they might open that up to where you can get coverage ahead of time,” Warfield said.
LRP insurance is available in all states, however, insured cattle must be physical located in the state where coverage is written at the time insurance attaches. Cattle can be moved to any state afterward.
“Once you take the coverage, if you have death loss, you must notify your insurance agent by email within 72 hours of the death, so you can retain the coverage,” Warfield said. “If you don’t notify them within that time window, you will forfeit your premium on the number of animals that die.”
Warfield said producers have until the month after the policy matures to pay their premium. If there is a claim, the premium will be deducted from the claim and the cattlemen will pay the difference if there is one. Another plus is that previously cattle owners could only sell cattle 30 days earlier than the end date of the policy. Now that rule has been extended to 60 days.
“That 30 days was kind of tough if you had an end date of March 15 and you were buying calves in fall, but it didn’t rain and forced you to sell them in January because there wasn’t enough wheat pasture, leading to a forfeiture of the policy, so the 60 days is a big advantage,” Warfield said.
Feeder cattle versus fed cattle
Livestock Risk Protection insurance is available in policies both feeder and fed cattle. After the application is accepted, specific coverage endorsements for both feeder and fed cattle can be bought throughout the year for up to 6,000 head of cattle. The annual limit for LRP-feeder and fed cattle is 12,000 head per producer per year.
Feeder cattle are expected to weigh up to 900 pounds at the end of the insurance period. Feeder cattle coverage is available for calves, steers, heifers, predominantly Brahman cattle and predominantly dairy cattle. Producers may also choose from two weight ranges: under 600 pounds and 600 to 900 pounds.
Livestock Risk Protection insurance for fed cattle is similar to feeder cattle, with a few differences. Cattle are expected to weigh between 1,000 and 1,400 pounds and will be marketed for slaughter near the end of the insurance period.
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According to USDA RMA, insurance does not attach until producers buy a specific coverage endorsement. Cattlemen may buy multiple specific coverage endorsements with one application. Insurance coverage starts the day a specific coverage endorsement is bought and RMA approves the purchase.
“With LRP, the producer has flexibility on the timing of coverage, length of coverage and selects the period that fits their risk management plan,” Warfield said.
Producers may buy LRP insurance throughout the year from any RMA-approved livestock insurance agents. Premium rates, coverage prices, and actual ending values are posted online daily.
To learn more about the LRP program, visit www.rma.usda.gov/Fact-Sheets/National-Fact-Sheets/Livestock-Risk-Protection-Feeder-Cattle-2018 or www.rma.usda.gov/en/Fact-Sheets/National-Fact-Sheets/Livestock-Risk-Protection-Fed-Cattle-2018.
Lacey Newlin can be reached at 620-227-1871 or [email protected].