With the unheard-of volatility in corn prices and a virtual guarantee that high-cost feed won't go away, cow-calf producers might be wise to consider some sort of price protection to ensure against a wreck waiting to happen.

USDA's Livestock Risk Protection (LRP) may be the safest form of price protection available. But forward contracting to lock in a price, or cross-hedging calves using feeder-cattle futures, may also work.

Ranchers have to admit they've had it pretty good price-wise for calves, at least until corn burst the bubble for all sectors. Now, they must worry about what those calves will be worth in the ethanol frenzy.

In early June, 400- to 450-lb. medium and large frame steers brought about $140/cwt. in Amarillo, TX; $131 in Missouri; and $141 in Oklahoma City. Those were good prices for calves. But what will the market be for four- and five-weight calves this fall?

How will even a normal corn crop that can't meet feed, biofuels and other demands impact grain prices — prices that will directly impact fed-cattle prices and what feedyards will pay for feeder cattle?

There are no sure answers to those questions. But the demand for corn for ethanol production can easily drive prices higher than cattlemen want to see, says Darrell Mark, University of Nebraska-Lincoln livestock marketing economist.

He and John Lawrence, Iowa State University (ISU) livestock marketing economist, have promoted the LRP program as one form of calf price protection for ranchers.

“It works similar to a put option hedge by creating a floor selling price, plus it fits smaller-sized operations better than futures hedging in many cases,” Mark says. “LRP is a prudent choice right now. All the markets are so volatile. When there's a good price offered, consider taking it.”

LRP is administered through USDA's Risk Management Association (RMA) and is available to producers and feeders in 20 states. These include Colorado, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Montana, Nebraska, Nevada, North Dakota, Ohio, Oklahoma, South Dakota, Texas, Utah, West Virginia, Wisconsin and Wyoming.

The price insurance is purchased through a local licensed crop insurance agent. Each set of cattle insured must be documented on a Specific Coverage Endorsement (SCE). There's no minimum number of livestock, but there are maximums that can be insured on a single SCE — 1,000 feeder cattle or 2,000 fed cattle, Mark says. In a given crop year (July 1-June 30), that's up to 2,000 feeder cattle and 4,000 fed cattle.

The coverage price insured by LRP is from 70-95% of the expected ending value of the cattle, which corresponds to deferred futures prices. LRP premium costs are higher for the higher coverage levels, but USDA provides a 13% subsidy on the total LRP premium. Coverage can be from 13-52 weeks in length.

Lawrence says the cost of an LRP is similar to the cost of a put option. “It behaves like a put,” Lawrence says. “It has a fixed adjustment for lightweight calves under 600 lbs., heifers separate from steers, Holsteins, Brahman, and heavy 600- to 950-lb. animals.”

Premium costs vary by the type of cattle and weight. For steer calves less than 600 lbs., there's a 110% price adjustment. The LRP coverage price, rates and expected ending values are available at www.rma.usda.gov/livestock/. Site users can enter their state and type of cattle to receive an on-screen report of LRP data to fit their cattle (see example below).

“Producers need to strongly consider LRP for price protection (while the cattle market is hot),” Lawrence says. “Our prices are directly tied to corn, and the good markets (in early spring) give us an opportunity to do something.”

He encourages cattlemen to change their thinking about markets. “A year ago, cattle or hog producers wouldn't have considered locking in $3 corn,” says Lawrence. “But they would like to see it now. We have to adjust our thinking on cattle just like on corn.

Continue reading on Next Page>