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3 insurance options for cattle producers

Brian Williams for Progressive Cattleman Published on 23 February 2018

I discussed risk in an article a couple of months ago and explained that risk exposure is often a daily occurrence for most cattle producers and often comes in two forms: price risk and production risk.

Traditionally when one thinks of risk in production agriculture, the topic tends to gravitate toward crop insurance. However, much less attention is given to insurance options for livestock producers. Fortunately, there are several insurance products that are available for cattle producers hoping to limit their risk.

Livestock Risk Protection (LRP) insurance is a policy developed and managed by the USDA’s Risk Management Agency (RMA) to serve as a tool for producers to manage price risk. Under a LRP insurance policy, cattle producers can select a coverage price that effectively sets a “price floor.” If a national cash cattle price index falls below the preset coverage price, a payment is triggered.

LRP insurance can be purchased for several potential time periods, ranging from roughly three months up to a year-long policy; however, the longer the time period, the higher the insurance premium will likely be. One of the most favorable attributes of a LRP insurance program is it can be utilized by producers of varying sizes, unlike future contracts. There is no minimum number of head required, so even small cattle producers can participate. A couple of downsides to LRP include the fact that it doesn’t protect against production risk, and it is not an effective tool to enhance profits, but rather protects against catastrophic price drops.

A second type of insurance product for cattle producers is the Livestock Gross Margin (LGM) insurance program. Like LRP, LGM is a policy developed and managed by the USDA’s RMA, with the biggest difference being that LGM takes into account the price of inputs as well as cattle prices. Primarily targeted toward feedlot owners, the LGM cattle insurance indemnity is triggered when the actual gross margin falls below a guaranteed gross margin, where the gross margin is the difference between the market value of fed cattle (revenue) and the price of feeder cattle plus feed costs (costs). Another similarity between LGM and LRP is neither protects against production risk such as death loss, but rather only protects against price risk.

Another option available to cattle producers looking to manage risk through an insurance program is the Whole-Farm Revenue Protection (WFRP) program. WFRP is unique in that it provides a safety net for all commodities grown or raised on the farm under one policy. This includes both crops (including feed) and livestock. There are several requirements that must be met for WFRP coverage, but the most important one is you must have filed a Schedule F or similar tax form for the previous five consecutive years for an established producer or for three consecutive years for a beginning farmer or rancher.

With the WFRP program, producers may choose coverage levels ranging from 50 to 85 percent, and payments are triggered when revenue for the insured tax year falls below the insured revenue level. The insured revenue level is the lower of the current year’s expected revenue and the whole-farm historical average revenue calculated using prior years’ Schedule F forms. The biggest benefit of WFRP is it protects against both price and production risk, while LRP and LGM protect only against price risk.

The three insurance products mentioned above are the most common products used by cattle producers, but there are other options available as well. For example, the Pasture, Rangeland and Forage insurance program has been growing in popularity in recent years. With several options available, cattle producers across the country who are interested in limiting exposure to risk should have no trouble finding a viable option. However, keep one important thing in mind when considering any insurance product: Insurance isn’t intended as a way to increase profits. Rather, these insurance products are best for protecting against catastrophic downside risk, should prices unexpectedly plummet or some other disaster strike.  end mark

Brian Williams
  • Brian Williams

  • Assistant Extension Professor
  • Mississippi State University
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