Livestock Risk Protection (LRP) A New Price Risk Management Tool for Livestock Producers

Transcription

1 Livestock Risk Protection (LRP) A New Price Risk Management Tool for Livestock Producers Tim Petry, Livestock Economist LRP Cattle Feedlot School Jan

2 LRP Insures against price declines Similar to put options 13% of premium is subsidized Crop insurance agents do not have to offer List of approved agents at: www3.rma.usda.gov/apps/agents/index.cfm

3 Livestock Price and Production Patterns 1. Seasonal 3. Long term 2. Cycle 4. Unexpected

4 LRP Feeder Cattle (beef, dairy, Brahman) Under 600 lbs Steers or heifers lbs Steers or heifers Fed cattle Hogs Lambs

5 LRP Feeder Cattle Based on Chicago Mercantile Exchange (CME) feeder cattle price index which is available at lb, M & L # 1, feeder steers at markets reported by USDA-AMS Same basis considerations as futures and options

6 9/1/05 11/1/05 1/1/06 3/1/06 5/1/06 7/1/06 9/1/06 11/1/06 1/1/07 3/1/07 5/1/07 7/1/07 9/1/07 11/1/07 1/1/08 3/1/08 5/1/08 7/1/08 9/1/08 11/1/08 1/1/09 3/1/09 5/1/09 7/1/09 9/1/09 11/1/09 1/1/10 3/1/10 5/1/10 7/1/10 9/1/10 11/1/10 1/1/11 CME Feeder Cattle Index ? % 21% 19% 22% 10%

7 CME Index and LRP Index: par for over 600 steer, under 600 heifer, under 600 Brahman + 10% for under 600 steer - 10% for over 600 heifer, over 600 Brahman - 15% under 600 dairy - 20% over 600 dairy

8 N.D. Feeder Cattle Basis Rule of Thumb E to W along I-94 Highway 2 deduct $2 to $ = par -4 to = = = = -5

9 Insurance Period Policies may be available for the following weekly lengths: 13, 17, 21, 26, 30, 34, 39, 43, 47, 52 Policy Size Any # up to 1,000 head per Specific Coverage Endorsement (SCE) 2,000 maximum per year (July 1 June 30)

10 Actuarials Coverage prices & rates change daily and are posted on the USDA Risk Management Agency (RMA) web site www3.rma.usda.gov/apps/livestock_reports/main.aspx Coverage levels will range from % of expected price

11 Indemnity Payment based on difference between COVERAGE PRICE (CP) & CME CASH SETTLEMENT PRICE (CS) CP = $105/cwt CS = $100 $5/cwt payment Producers must submit 04-LRP-Claim Form within 60 days of end of contract

12 Year Fall Steer Calf LRP Results July 15 to Oct 15 (13 wk) Coverage Price Premium Actual Price LRP Payment LRP Profit Year Nov 15 (17 wk) Coverage Price Premium Actual Price LRP Payment LRP Profit

13 SF_LS766 Sioux Falls, SD Thu Nov 18, 2010 USDA-ND Dept Ag Market News Stockmens Livestock Exchange - Dickinson, ND Feeder Cattle Weighted Average Report for 11/18/2010 Receipts: 4601 Last Week: 3650 Year Ago: 3936 Compared to last week: Steers calves traded 2.00 to 4.00 higher. Heifer calves traded steady to 3.00 higher. Demand was good with active trading. Steers made up 55 percent. Heifers made up 44 percent. Feeder bulls made up 1 percent. 52 percent over 600 lbs. Next sale is scheduled for December 2, Feeder Steers Medium and Large 1 Head Wt Range Avg Wt Price Range Avg Price Fancy Fancy Calves Calves Fancy Calves

14 Backgrounding Steer LRP Results Aug 25 to Jan 20 (21 wk) Year Coverage Price Premium Actual Price LRP Payment LRP Profit

15 SF_LS796 Sioux Falls, SD Fri Jan 21, 2011 USDA-ND Dept Ag Market News North Dakota Weekly Auction Summary - For the week ending Jan 21, 2011 Receipts: 9,831 Last Week 13,705 Last Year 16,527 Combined results of 4 auctions this week: Kist, Napoleon, Stockmen s and West Fargo. Feeder Steers Medium and Large 1 Head Wt Range Avg Wt Price Range Avg Price Fancy Calves Calves Calves Fancy Value Added Calves

16 Fed Cattle (Steers or Heifers) lb., Select or higher, YG 1-3 Based on 5-area weighted average 35 to 65 percent choice steer price Released each Monday morning Any # up to 2000 head per SCE 4000 maximum per year

17 LM_CT150 St. Joseph, MO Mon Jan 24, 2011 USDA Market News Service 5 AREA WEEKLY WEIGHTED AVERAGE DIRECT SLAUGHTER CATTLE Texas/Oklahoma/New Mexico; Kansas; Nebraska; Colorado; Iowa/Minnesota feedlots (Includes all transactions regardless of delivery day) For: Week Ending Sunday, 1/23/2011 Confirmed: 128,290 Week Ago: 154,806 Year Ago: 133,074 LIVE FOB BASIS - Beef Breeds Head Weight Price Avg Wtd Avg count Range Range Weight Price STEERS Over 80% Choice 3,395 1,165-1, , % Choice 10,418 1,225-1, , % Choice 16,425 1,110-1, , % Choice 196 1,215-1, , Total all grades 30,434 1,110-1, , HEIFERS Over 80% Choice 4,754 1,189-1, , % Choice 9,980 1,078-1, , % Choice 16,788 1,050-1, , % Choice - - Total all grades 31,522 1,050-1, ,

18 Cattle LRP Timetable MARKET CLASS MARKET DATE LRP CONTRACT Under 600 Nov 15 AUG JUL JUN MAY Over 600 Feb 15 NOV OCT SEP AUG Fed Jul 15 APR MAR FEB JAN

19 LRP Advantages Small numbers can be hedged 600, 600, heifers, dairy Premium subsidized 13% No brokerage or margin Receive higher prices in bull market Available in months where no futures/options All coverage prices available daily Disadvantages Not flexible like futures and options Must own the livestock 10% rule for calves and heifers

20 Steps to LRP 1. Submit eligibility application form with insurance agent 2. Select a SCE (coverage prices and premiums are available after 5 PM (CST) except holidays) 1. Number of head 2. Policy length closest to marketing date 3. Estimated average market weight 4. Choose coverage price 3. Pay premium to agent 4. Agent submits SCE form electronically (hours are between 5 PM and 9 AM (CST), Tues-Sat only)

21 Volatile Prices Price Risk Management Necessary! Questions?