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Insurance options help manage feeder cattle risks

James Sedman and John Hewlett Published on 24 December 2010

Cattle producers are painfully aware they operate in uncertain and volatile times.

Uncertainty over prices, input markets, extreme weather and other factors can make profitability tough.

Having an effective risk-management plan is more important than ever. It is important to begin with a sound operating plan, including goals and objectives. If feeder cattle are purchased, knowing the cost structure and the effective price range for a profit are the first steps to managing price risk. There are several Federal Crop Insurance Corporation programs to help producers manage their price and revenue risk when time to market their feeder cattle.

Livestock Risk Protection insurance (LRP)

LRP policies may help offset revenue losses associated with declining feeder cattle future prices.

A producer completes a one-time application for coverage and determines the number of head and the production period (13, 17, 21, 26, 30, 34, 39, 43, 47 or 52 weeks). Coverage may be purchased for up to 1,000 head per contract and 2,000 head per year. Producers may choose between two weight ranges: under 600 pounds and 600 to 900 pounds, with 900 pounds per head the upper weight limit of the contract.

Coverage prices and premium rates are posted daily and directly tied to Chicago Mercantile Exchange (CME) prices. Producers select a coverage level of 70 to 100 percent of the expected ending value. If the actual value determined by current prices drops below the insured expected values established by the expected weight and insured price, then an indemnity may be due. Keep in mind the current price for LRP is determined by a national cash price and not the price received when actually selling cattle.

LRP policies can be a good fit for most feeder cattle operations, including grass-based and feedlot operations. Using LRP has certain advantages over futures and options trading for producers with smaller herd numbers or smaller lot sizes, mainly because there is no lower limit on contract size as with futures contracts.

LRP may be more cost-effective for producers in protecting against bottom-side price risk (market moves that reduce producer revenue) than futures contracts, depending on geographic location.

Vegetative Index-Pasture, Rangeland, Forage (VI-PRF) insurance

Feeder cattle operators who operate primarily on grass have an insurance product to protect their feed source. VI-PRF insurance protects producers against losses on pasture and forage raised for feed. VI-PRF uses imagery from the U.S. Geological Survey to determine vegetative greenness and thus insurance coverage for individual 4.8-by-4.8-mile grid areas. Losses are determined by measuring actual greenness against the indexed greenness for a given three-month time period.

Producers can insure any hay or pastureland with a productivity factor from 60 to 150 percent and coverage from 70 to 90 percent. Producers can insure both pasture and hay land at relatively low premium rates.

VI-PRF is much more localized and targeted when paying indemnities than previous forage insurance products based on county-wide hay yields.

Although Sept. 30 was the sales closing date to purchase coverage for the 2011 crop year, producers might investigate the PRF product over the winter. Being aware of the deadlines and grid information is especially important to make an informed decision.  end_mark

—Excerpts from University of Wyoming Cooperative Service Barnyards and Backyards