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Seminars set for renewed livestock risk protection program
Nebraska
Livestock producers who want to learn more about the USDA's renewed Livestock Risk Protection program can attend free seminars scheduled across the state throughout November, beginning in North Platte on Nov. 5.
Education about the livestock risk insurance program is being conducted by Nebraska Cattlemen, Nebraska Farm Bureau, Nebraska Pork Producers, and UNL Cooperative Extension.
After being forced to shut down its experimental Livestock Risk Protection program in the wake of the December 2003 discovery of bovine spongiform encephalopathy in the U.S., the U.S. Department of Agriculture's Risk Management Agency (RMA) revamped the program and brought it back again as a pilot project on Oct. 1 in select states, including Nebraska.
Two significant changes were made in response to the problems encountered after BSE was announced on Dec. 23, 2003. First, producers will be able to obtain coverage only from about 5 p.m. to 9 a.m. (Central). After futures trading ends each afternoon, RMA will calculate LRP insurance rates based on that day's trade and publish them on its website. Sales of LRP contracts to producers at those rates will end just before the next day's futures trading. So, LRP insurance will only be available when futures are not trading.
A second change formalizes the process for suspending LRP sales if large price moves occur in the market. Sales of LRP contracts will be suspended if at least four futures contracts move the daily price limit for two consecutive days. Sales of LRP would resume when at least four contracts fail to reach the daily price limit for two consecutive days.
RMA also made changes to the feeder cattle contract. These include offering shorter insurance period lengths of 13 and 17 weeks (in addition to the 21, 26, 30, 34, 39, 43, 47 and 52-week periods previously available) and expanding sales to cover feeder heifers, dairy feeder cattle, Brahman feeder cattle, and feeders weighing less than 600 pounds. Price adjustment factors were also implemented to account for the differences between feeder-steer prices and prices of other types and weights of cattle.
Other 2004-2005 LRP provisions are the same as the 2003-2004 pilot program. Details are available at www.rma.usda.gov or in NebFact 03-583 (http://agecon.unl.edu/mark/Papers/NF03-583.pdf).
While insurance is limited to 2,000 feeder cattle, 4,000 fed cattle, and 32,000 hogs per year per insured individual, LRP can be a useful price-risk management tool. In addition to being able to insure as few as one head, it does not require a brokerage account, margin money, or commission to hedge price risk. Instead, producers buy LRP price protection through crop insurance agents.
Hedging price risk with LRP is similar to creating a floor price using put options. However, the basis risk associated with hedging with LRP is different than when hedging with futures/options. Because LRP insurance is indemnified on a national cash index, the relevant basis to consider is the difference between the actual selling price and the national cash price index (rather than the producer's actual selling price and the futures price, as in the case of hedging with futures and options). Not only is this important when projecting expected hedged sales prices, but it also offers some reduction in basis risk because producers are no longer exposed to risk of changes between the futures and the national cash price index.
Whether hedging with LRP, futures, options, or cash contracts, it is important to remember that each has its advantages and disadvantages. But none of them--including LRP--provides a "silver bullet" to create profit opportunities where they do not already exist. In other words, LRP, like other market-based tools, will not enable producers to create a hedged sales price above break-even if their input costs (including the cost of feeder animals) are too high.
LRP Seminars Schedule: North Platte, Nov. 5, 1 p.m. to 4 p.m. at UNL West Central Research and Extension Center; Scottsbluff, Nov. 12, 9:30 a.m. to noon, at UNL Panhandle Research and Extension Center; Beatrice, Nov. 15, 1 p.m. to 4 p.m. at the Gage County Extension Office; Fremont, Nov. 17, 1 p.m. to 4 p.m. at Dodge County Extension Office; and, Norfolk, Nov. 22, 1 p.m. to 4 p.m. at Lifelong Learning Center.
Interested producers are encouraged to contact their local extension office for details.
Date: 10/20/04
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