Agency offers tools to help manage livestock marketing risk
The USDA Risk Management Agency (RMA) administers federal crop, livestock and range insurance programs and offers products to producers based on the five areas of risk to an operation: marketing, financial, legal, human and production.
“Traditionally our areas were corn and soybeans and multi-peril insurance for farmers, but, over the last couple farm bills, Congress has realized we need to offer products to ranchers, and that’s how we ended up with new products,” says Tara Beley of the USDA RMA Billings Regional Office, which serves Montana, Wyoming and the Dakotas.
Of why to consider insurance, Beley says, “Our livestock products can help livestock producers mitigate risk just like a corn producer by helping to address marketing issues, setting a price floor to protect a price, and they’re also used to address production. Our products can help protect against weather and pests, and there are some financial issues, too. Some lenders like to see crop insurance, and having insurance can help participation in some programs, like with the Farm Service Agency.”
She adds that, although useful in some cases, insurance products aren’t right for every operation.
“It’s important to evaluate production and finances on your operation, and insurance products are one of many things to help you be more profitable,” she says.
Explaining the five areas of risk, Beley says risk management strategies in marketing help with decisions that turn products into revenue, like contracting, niche marketing, futures and options or insurance products. Legal risk includes contracts, tax issues, bankruptcy and succession issues. Production risk encompasses weather, pests and diseases, while financial risks are composed of impacts to profitability, credit cards, credit scoring, debt management, lending/borrowing and budgets. Human risk is that involving human error, farm equipment issues, the affect of pesticides and herbicides and marketing decisions.
Beley says there are two basic types of livestock insurance – Livestock Risk Protection (LRP) for feeder cattle, fed cattle, lambs and swine and a Livestock Gross Margin (LGM) product, which is available for fed cattle, dairy and swine.
“LRP only takes price into account, and LGM takes input into consideration,” explains Beley. “LRP is a tool to insure against unexpected market price declines during a selected insurance period based on the Chicago Mercantile Exchange (CME). Producers can lock in a price and protect against downward movement on the CME, with no basis adjustment for local price.”
“You’re setting a price floor based on the price you lock in, and you can take advantage of upward market movement,” she continues.
To determine what price to lock in, a tool on the RMA website shows how much a producer will pay for what price. Producers select an insurance period running from 13 to 52 weeks, although not every period is available for every product. Beley says that, typically, 13-, 26- and 52-week time periods are most frequently used.
“The dates correspond to when you anticipate your livestock will be sold, and a maximum of 1,000 head may be insured under one specific coverage endorsement,” she says.
To put livestock insurance in place, producers make a one-time application with a livestock insurance agent, who can be located through the RMA website. The application is submitted to the insurance company for approval, and a producer must purchase at least one specific coverage endorsement to lock in the price and coverage level.
“When purchasing the product, a producer will determine how many head and the date and weight he expects to market the livestock, and he’ll also choose the coverage price and endorsement length,” says Beley. “The coverage price can be from 70 to 100 percent of the price.”
A producer collects indemnity if the actual ending value on the livestock’s delivery date is lower than the price they locked in when they purchased the product, minus their premium and adjustments for market considerations such as sex, Brahman or dairy influence. The actual live selling price is not considered, and fed cattle must be Yield Grade 1, 2 or 3, and Select or higher in quality grade.