Last year was not kind to many Wyoming crop and livestock producers, and John and Cindy Robb’s Weston County cow-calf operation was no exception*.
Extreme winter and summer weather affected their calf numbers and weaning weights. Price declines beginning in late summer, when they typically market their calves, further reduced revenues.
Covering at least some of their risk for revenue loss caused by price declines is one of their goals for the next production season. There are many alternatives to manage price risk; however, the Robbs would prefer an insurance option for several reasons: minimal cash outlay when compared to utilizing futures and options marketing plans, and coverage is tied to the overall feeder cattle market price.
Livestock Risk Protection Insurance (LRP)
LRP insurance helps livestock producers manage market price risk. LRP is available in Wyoming for feeder and fed cattle, swine, and lamb production.
A producer first determines the number of head (in total pounds) and their marketing period. Contract lengths are available from 13 to 52 weeks in four-week increments (see chart, right). LRP prices and coverage are determined by Chicago Mercantile Exchange (CME) prices, based on the contract length and are posted daily by the Risk Management Agency (RMA).
Producers can insure from 70 to 100 percent of the expected ending value for a contract, with the premium paid at the beginning of the LRP contract period. Indemnities are paid on the difference if the actual ending value is lower than the contract coverage price.
Note that the actual price received for the insured animals has no bearing on the prices used in the LRP contract; prices are based on the CME index price and are basically a reflection of the overall market. There are limits on numbers of head, both per contract and for the overall year, and those vary by species insured.
Useful LRP Links
Daily prices, rates, and ending values:
Application and Analysis
For purposes of our example, we will assume the Robbs will use an LRP feeder cattle policy for price protection on their steer calves. They typically calve in March and market their calves at the end of September.
This year they expect to market 100 head of steers, weighing 600 pounds (60,000 pounds or 600 cwt). We will assume a 21-week contract at 96 percent coverage. Using the cost estimator from RMA, we enter the information shown. The tool provides results showing a total insured value of $77,964 and a total producer premium cost of $2,967.
The Robbs now have a general estimate of what an LRP policy would cover, as well as a cost estimate for their steer calves. The question next becomes, how effective is this coverage?
To answer this question, the Robbs need to look at their proposed LRP policy via a partial budget analysis. The Risk Scenario Planning (RSP) tool, available from RightRisk.org, is designed to help evaluate the inherent risk associated with various farm management decisions. Too often, values are used in a budget that are essentially guesses, which then become more like facts as planning progresses. In reality, many of those estimates can be variable.
The RSP tool allows users to include risk in their decisions by entering the most likely, maximum, and minimum values, allowing the tool to estimate how that variability might affect the outcome. The RSP tool is based on a partial budget framework divided into four categories: added returns, reduced costs, added costs, and reduced returns (visit RightRisk.org for a detailed explanation of partial budgeting and examples of its use).
Once the problem has been setup, the user provides a range of values (in this example we would use prices or coverage value) to account for the variability. In the next installment, we will examine how the Robbs might use the RSP tool to evaluate their proposed LRP coverage.
*The Robb operation is a case study example created to demonstrate RightRisk tools and their application. No identification with actual persons (living or deceased), places, or agricultural operation is intended nor should be inferred.
Sign-up has begun for the Coronavirus Food Assistance Program (CFAP) offering direct assistance to crop and livestock producers negatively affected by the coronavirus outbreak.
Producers who sold livestock from January 15-April 15, are eligible for assistance through the first round of payments.
Producers will be eligible for a second payment based on their highest inventory number from April 16-May 24.
For more information, including worksheets showing payment rates for various livestock classes and eligibility, visit Farmers.gov/CFAP/livestock.
For more information on insurance and other risk management resources
There is no time like the present to assess and improve your risk management planning. Numerous options are available under the Federal Crop Insurance umbrella of programs, including policies for most crop, livestock, and forage production. Chances are good there is a program that will meet your needs. Visit the USDA Risk Management Agency (RMA) at rma.usda.gov or a local crop insurance representative to learn more. See RightRisk.org for risk management education, including online tools, courses, and other resources dedicated to helping producers with risk management planning.
James Sedman is a consultant to the Department of Agricultural and Applied Economics in the University of Wyoming College of Agriculture and Natural Resources, and John Hewlett is a farm and ranch management specialist in the department. Hewlett may be reached at (307) 766-2166 or email@example.com.