Livestock Risk Protection Insurance Changes to Become Even More Appealing for Producers

This was first published by RightRisk News on Oct. 22, 2020.

In 2002, the USDA Risk Management Agency (RMA) first introduced Livestock Risk Protection (LRP) insurance contracts to provide livestock producers with an alternative tool for protecting national price levels for future sales of livestock through a USDA subsidized insurance product. First released for swine, it soon became available for feeder cattle, fed cattle, and lamb. After remaining relatively unchanged since inception, several enhancements and improvements have taken effect in the LRP insurance program the last 18 months.  This newsletter article will attempt to summarize those changes to bring everyone up-to-date and provide an example of how LRP-Feeder Cattle would have performed for a sample protection strategy under both the old subsidy levels and the new subsidy levels.

The changes to LRP started in the summer of 2019 with an expansion in the geographic area of availability, an increase in the premium subsidy levels, updates to the Chicago Mercantile Exchange (CME) trading requirements to allow for more insurance endorsement lengths and coverage prices available for purchase, increases to the head per endorsement and annual head limits, and a modification to the price adjustment factor for dairy cattle. In the summer of 2020, further increases to the premium subsidy levels and a change to allow for the payment of the insurance premiums to take place at the end of the endorsement period instead of the beginning were announced to take effect July 1, 2020. Finally, in September 2020, RMA announced further increases to the premium subsidy levels, more increases to the limits on the number of head per endorsement and head per year that could be insured, a modification to the ownership requirement period limit at the end of the endorsement, and the creation of new feeder cattle and swine types to allow for unborn livestock to be insured.

Premium Subsidies

Increases in the premium subsidy rates have made LRP insurance a more affordable option of price protection for producers to purchase. LRP premiums were subsidized by the USDA at 13 percent up until the changes started in mid-2019. The series of increases in the subsidy rates since then have resulted in the current subsidy rates displayed in Table 1. New and beginning producers receive an additional 10 percent premium subsidy. The subsidy increases in September 2020 are retroactive to July 1.

Premium Due Date

Another important change that took effect July 1, 2020 is a change to when the premium cost is due. Previously, the premium cost was due at the time the specific coverage endorsement (SCE) was put in place. Now, the premium is not due and payable until the end of the endorsement period. LRP is purchased in a two-step process. The first step is to submit an application to purchase LRP insurance through a livestock insurance agent. The second step is to submit a SCE for each group of animals to be insured. Multiple specific coverage endorsements can be done under one application. In the past, producers had to plan carefully with their insurance agents to arrange payment on the day of purchase. The new premium due date is a positive development for livestock producers and should make the process of purchasing LRP more convenient and less of a strain on cash flow.

Head Limits

The number of head that can be insured per SCE and annually have expanded considerably for both cattle and swine. For example, the limits on the number of head of cattle that could be insured per SCE and per producer per year used to be 1,000 head and 2,000 head, respectively. Those numbers have now risen to 6,000 head per SCE and 12,000 head annually. Forty thousand head of swine can now be insured on a single SCE and 150,000 head can be insured annually per producer. The limits for lamb remain at 2,000 head per SCE and 28,000 head annually.

Modified Requirement to Owning Insured Livestock

The changes made in September 2020, modified the requirement of owning the insured animals throughout the endorsement period. Previously, the animals had to be born and alive at the time the SCE was purchased and ownership of those animals had to be maintained to within 30 days of the end of the endorsement period for the insurance coverage to remain in force. The new requirements for 2021 crop year that began July 1, 2020 relax the ownership requirement window to 60 days from the end of the endorsement period and allow for insuring yet-to-be-born feeder cattle and swine. Related to this change, endorsement lengths of 39 weeks and 52 weeks were added for swine.

Other Changes

LRP coverage for swine, fed cattle and feeder cattle was expanded in 2019 to include all counties in all states. LRP coverage for lamb remains available in only 28 states including all of the western continental states, the upper Midwest, West Virginia, Virginia, and Pennsylvania. The 2019 updates to the Chicago Mercantile Exchange (CME) trading requirements that expanded the insurance endorsement lengths and coverage prices available for purchase has had the desired effect with several more contract options for cattle and swine producers to choose from on a daily basis.

Example for LRP-Feeder Cattle: Retained Calves

Table 2 shows how LRP-Feeder Cattle insurance contracts would have performed for a cow-calf producer retaining steers from the end of October until the end of January. A 13-week LRP contract for Steers Weight 2 (600-900 pound ending weight) entered into at the end of October from 2015-2019 providing coverage for prices at the end of January would have added an average of $3.65 per hundredweight to the bottom line under the 13 percent LRP premium subsidy policy in place at the time they were purchased. With the new premium subsidy rates in effect now, this net LRP effect would have increased to $4.80 per hundredweight.

More important is how LRP controls the downside risk while allowing the producer to participate in upward price movements. For example, the 2016 calf crop represents the only year over this span where the January feeder cattle contract prices moved up between the end of October and the end of January. The net effective price of $127.31 from the national market with this LRP contract at the new subsidy level captures 80 percent of the upward price movement from a $115.54 expected ending value to a $130.29 actual ending value that year. Meanwhile, for the other four years, the average expected ending value was $159.23 compared to an actual ending value average of $148.26. The average net effective price of $155.00 for those four years mitigates 62 percent of the downside price risk that occurred. Of course, the effect of LRP insurance is most pronounced in years where the price moves down considerably like it did for the 2015 calf crop. That year it moved from a relatively high expected ending price of $183.08 to an actual ending value of $160.58. The $16.40 net effect of LRP mitigated 73 percent of the downside price risk that occurred in the national market that year.

LRP insurance is an important tool in the toolbox for livestock producers to use in managing national market price risk. Producers using LRP still market their calves in their local or regional markets. The net effects of LRP insurance contracts will add to and complement an effective local marketing plan. The recent changes to LRP will make it more affordable and more accessible for producers to use.

For more information on LRP insurance visit https://www.rma.usda.gov/Policy-and-Procedure/Insurance-Plans/Livestock-Insurance-Plans or contact your local livestock insurance agent.