Livestock insurance 101

You can have a safety net if you pay your own way.

For many corn and soybean growers, crop insurance has been a risk management mainstay for years now. Livestock insurance has been around awhile, too, but hasn’t gained as much traction with producers.

“That may be changing,” said Ray Massey, University of Missouri extension economist. “Livestock insurance can be a useful safety net. But unlike crop insurance, it has nothing to do with yield; it’s price protection.”

Two types of livestock insurance are sold through USDAs Risk Management Agency (RMA). Livestock Risk Protection (LRP) protects producers against a drop in prices. Livestock Gross Margin (LGM) insurance protects producers from losses of gross margin, from falling livestock prices, rising feed costs or both. Neither of these policies protects producers against a disease outbreak or death losses.

Both of these types of insurance can be purchased to cover finished beef cattle, feeder cattle, market hogs, market lambs or dairy. With relatively low feed prices and variable livestock prices, producers might want to take a look at LGM as a way to lessen the variability.

Of course, livestock producers can lock in prices through the futures market, but that requires a contract for a sizable number of animals or pounds of a commodity. Both LRP and LGM offer price protection on any number of animals. Also, futures markets mean brokerage fees and perhaps margin calls should the market turn against the position taken. LRP and LGM premiums are federally subsidized, which makes them less expensive than most other forms of price protection.

One thing you need to keep in mind, though: both LRP and LGM settlements are based on national market prices, not necessarily the price you receive. Your own price may be above or below what the national market was. By the same token, your own cost of production is not the figure used to determine gross margin; that is calculated with national grain prices from the Chicago Board of Trade.

Livestock Risk Protection for feeder cattle is designed to insure against dropping market prices. Producers may select from among a variety of coverage levels and insurance periods that match when their cattle would normally be sold. (Note: ownership of the cattle may be retained.)

“Not many cattlemen in this region buy price protection or margin insurance,” said Logan Wallace, University of Missouri extension livestock specialist in south-central Missouri.

But the insurance can be bought throughout the year from approved livestock insurance agents. Premiums, coverage prices and actual ending values are posted online daily at www.rma.usda.gov/tools/livestock

To participate, feeder cattle producers fill out a one-time application for LRP coverage. Once the application is accepted, specific coverage endorsements can be purchased for cattle or calves in two weight ranges: under 600 lbs. and 600-900 lbs. Each producer may lock in prices ranging from 70 percent to 100 percent of the expected ending value, on up to 2,000 head for each crop year. Length of insurance coverage for each endorsement can be 13, 17, 21, 16, 30, 34, 39, 43, 47 or 52 weeks. 

Coverage is available for beef calves, steers and heifers, including cattle of predominantly Brahman and predominantly dairy breeds. At the end of the insurance period, if the actual ending value is below the covered price, the producer is paid an indemnity for the difference.

Dairy cycles might discourage sign-up right now. “Don’t expect the next five years to be much like the 2009-to-2013 period,” said Joe Horner, University of Missouri dairy economist. “In the new farm bill, dairymen are treated pretty well, especially those producing less than 4 million pounds of milk per year.”

With relatively strong margins now—good milk prices and lower feed costs—many producers aren’t worried about a safety net. But they should be, Horner supposed.

“When milk prices crash—and they always do—dairymen need some protection,” he said. “There were times in the past 10 years when the only thing keeping us afloat was MILC [the federal Milk Income Loss Contract] program payments.”

The MILC program is on the way out, but in its place, the new farm legislation creates margin protection coverage that could offer even more stability to dairy operations. Given the mouth-full moniker, Dairy Producer Margin Protection Program (DPMPP), the program goes into effect Sept. 1, or sooner if USDA gets all the wrinkles ironed out. The MILC program will end when DPMPP kicks in.

DPMPP is, in effect, a margin protection insurance program, designed to protect farm equities by guarding against low margins. The program will provide dairy producers with indemnity payments when dairy margins (all-milk price over feed costs) are below the margin coverage selected by the producer. In this way, DPMPP supports producer margins, not milk prices.

All dairy operations are eligible and will pay an annual fee of $100 to participate. In 5 percent increments, producers can protect from 25 percent up to 90 percent of their production history. Producers can select margin protection coverage (in 50-cent increments) from $4 per hundredweight through $8 per hundredweight of milk produced. Payments will be made when margins fall below the selected level of coverage for two consecutive months.

At the $4 per hundred level the protection is without premium cost. For dairymen marketing less than 4 million pounds of milk per year (the production from about 200 cows), the premium scales up from one penny for $4.50 coverage to 4.75 cents per hundred for $8 coverage, and premiums are reduced by 25 percent for calendar years 2014 and 2015. Dairymen marketing more than 4 million pounds of milk per year pay considerably higher premiums.

While DPMPP can be used in tandem with other risk management vehicles, such as forward contracting or futures, the program cannot be coupled with the Livestock Gross Margin program—although it’s difficult to imagine who might want to.

Livestock insurance agents are available. Most (but not all) crop insurance agents also sell livestock insurance and vice versa. An agent may have an office in one county or state but sell and service policies in other counties and states.

Most FCS Financial offices also sell crop and livestock insurance policies. To find the FCS Financial office near you, call toll-free 800/444-3276 or go to www.myfcsfinancial.com.

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