Risk Management Through Livestock Insurance Programs

Crop farmers have been using insurance for years in order to minimize risk, protect against disaster and establish price bottoms. It was only a matter of time before livestock insurance became readily available, and two programs, Livestock Risk Protection (LRP) and Livestock Gross Margin (LGM) insurance, were the topics of discussion at a recent beef marketing/risk management session I attended last week. Tia McDonald, Extension associate in the Department of Economics at South Dakota State University (SDSU) reviewed the benefits of LRP and LGM to the producers in attendance at this meeting, and she encouraged ranchers to take advantage of these opportunities to minimize risk when making marketing decisions down the road.

Livestock Risk Protection (LRP) insurance covers the risk of price declines for feeder cattle, fed cattle, and swine. It provides producers an indemnity if a regional or national cash price index falls below an insured coverage price. Similar to a put option, the LRP policy is price insurance only, providing single-peril price risk protection for the future sale of insured livestock, explained McDonald in referencing information provided by the University of Nebraska-Lincoln (UNL).

Livestock Gross Margin (LGM) insurance offers protection against a decline in the feeding margin for cattle and swine. An indemnity is paid if the insured gross margin is greater than the total actual gross margin at the end of the insurance period.

Both insurance policies are available through the crop insurance agent system. Neither of these products guarantee a cash price received as the producer's actual cash market selling price is not used to determine indemnities. LRP and LGM Insurance programs allow producers to customize these products to their individual needs and efficiently manage price risk without the use of the futures market.

I had the opportunity to interview McDonald following her presentation to further explain these two livestock insurance programs available to producers. Take a minute or two to listen to our conversation below. Have you heard of these programs before? If so, have you thought about using them? Does anyone have experience with these programs to add to the conversation today? I think these are two risk management options worth considering for producers developing a marketing strategy, and if anyone has a success story, I would love to hear it.

BEEF Daily Quick Fact: In 2009, 4,072 head were insured through LRP in the state of South Dakota, more than any other state on record. In South Dakota, 1,500 head of fed cattle were insured using LGM in 2009. Iowa had the most enrolled in this program in 2009 with 2,815 head. (Source: McDonald)