The U.S. Department of Agriculture’s Risk Management Agency announced June 9 that there are changes to the Livestock Risk Protection insurance program for swine, fed cattle and feeder cattle. The improvements, which include moving premium due dates and increasing premium subsidies, will be implemented by July 1 for the 2021 crop year. In addition to the changes, the Risk Management Agency is authorizing additional flexibilities – spurred by the coronavirus – for producers working with approved insurance providers.

Livestock Risk Protection insurance

Livestock Risk Protection is an insurance plan designed to protect against a decline in market price. The insurance is typically available for fed cattle, feeder cattle, swine and lamb. Policyholders may choose from a variety of coverage levels and insurance periods that match the time livestock would normally be marketed. Interested producers must submit one-time applications for coverage. Once an application is accepted, the producer may purchase specific coverage endorsements daily throughout the year. Premium rates, coverage prices and actual ending prices are posted daily online.

Coverage levels range from 70 percent to 100 percent of the expected price. If at the end of the insurance period the actual ending price is less than the insurance guarantee, a producer will receive an indemnity payment for the difference between the coverage price and the actual ending value. Producers must purchase all Livestock Risk Protection coverage through an approved livestock-insurance agent, a list of which is maintained on the Risk Management Agency website. Livestock Risk Protection insurance runs on a crop year of July 1 to June 30. It doesn’t cover any peril such as mortality, individual marketing decisions or physical damage to the livestock other than change in price.

Note: The Federal Crop Insurance Corporation recently suspended sales of Livestock Risk Protection for lamb due to data-availability issues, so Livestock Risk Protection-Lamb will not be discussed further in this article.

Livestock Risk Protection-Fed Cattle

For Livestock Risk Protection-Fed Cattle insurance, producers can buy specific coverage endorsements for as many as 2,000 head of heifers and steers, weighing between 1,000 and 1,400 pounds, that will be marketed for slaughter near the end of the insurance period. Producers face an annual limit of 4,000 head for each crop year. All insured cattle must be located in an approved state at the time of purchase for insurance coverage.

Specific coverage endorsements are available in lengths of 13, 17, 21, 26, 30, 34, 39, 43, 47 and 52 weeks. The actual ending value for Livestock Risk Protection-Fed Cattle is the price of fed cattle as calculated by USDA’s Agricultural Marketing Service in its “5 Area Weekly Weighted Average Direct Slaughter Cattle” report. The price series is the “Live Basis Sales, Steers, ‘35-65 percent Choice’” category.

Livestock Risk Protection-Feeder Cattle

For Livestock Risk Protection-Feeder Cattle insurance, producers can purchase specific coverage endorsements for as many as 1,000 head of feeder cattle that are expected to weigh as much as 900 pounds at the end of the insurance period. The annual limit per producer is 2,000 head for each year. All insured calves and cattle must be located in a state approved for Livestock Risk Protection-Feeder Cattle at the time the policy is purchased.

Each specific coverage endorsement can be purchased for a length of 13, 17, 21, 26, 30, 34, 39, 43, 47 or 52 weeks. Coverage is available for calves, steers, heifers, predominantly Brahman cattle and predominantly dairy cattle. Producers have the option of choosing from two weight ranges – less than 600 pounds or between 600 and 900 pounds. The actual ending value for Livestock Risk Protection-Feeder Cattle is the weighted average price of feeder cattle calculated by the Chicago Mercantile Exchange for the cash-settled commodity index price multiplied by a price-adjustment factor for each type of feeder-cattle and weight category.

Livestock Risk Protection-Swine

For Livestock Risk Protection-Swine insurance, producers can buy specific coverage endorsements for as many as 20,000 hogs that are expected to reach market weight near the end of the insurance period. The annual limit per producer is 75,000 hogs for each crop year. The length of insurance coverage available for each specific coverage endorsement is 13, 17, 21 or 26 weeks.

Livestock Risk Protection-coverage sales are typically offered every market trading day; they run from the afternoon after market close until the following morning. The actual ending value for Livestock Risk Protection-Swine is the weighted average price of lean hogs, which is derived using two producer-sold-data series in the “Negotiated” and the “Swine or Pork Market Formula” categories. That’s the same price series used to settle the lean-hog futures contract at the Chicago Mercantile Exchange.

Learn Livestock Risk Protection calculations

Let us examine a hypothetical Livestock Risk Protection-Fed Cattle situation to calculate what the premium and indemnity would be. Let’s say an operation has 100 head of fed cattle and anticipates marketing the cattle at 1,100 pounds or 11 hundredweight each. They have selected a coverage level of 95.8 percent. In this example we will assume they purchase today and visit the Risk Management Agency website to view available Livestock Risk Protection-coverage prices, rates and actual ending values. The producer sees that for fed cattle in Texas the current expected ending value for a 17-week endorsement is $99.42 per hundredweight, the coverage price is $95.25 – the endorsement price multiplied by the coverage level – and the rate, which is contained in a rate table published daily in the actuarial documents, is 4.1407 percent. Actuarial rates depend on the coverage price and endorsement length selected. Note the 17-week endorsement that would settle in mid-October is purchased in mid-June, at which point if there was a price loss an indemnity would be paid.

Calculate producer premium -- First determine the insured value, which can be calculated by the following formula.

insured value = number of head x target weight x coverage price x insured share

In this case the number of head is 100, the target weight is 11 hundredweight, the coverage price is $95.25 and the insured share is 100 percent. That leads the insured value to be $104,775.

Then the total premium needs to be calculated.

total premium = insured value x rate

In this case we have already calculated the insured value. We know the rate from the actuarial tables is 4.1407 percent. That results in a total premium of $4,338 for the insured value. That’s the total premium, not accounting for the subsidy factor. To calculate the premium actually owed by the producer the subsidy must be calculated.

producer premium = total premium – (total premium x subsidy factor)

We have already calculated the total premium of $4,338. We know the subsidy factor for this coverage range is 20 percent. That would result in a premium of $3,471 owed by the producer.

Calculate indemnity -- Let’s hypothetically say that as mid-October rolls around and the COVID-19 demand destruction has magnified at the consumer level, decreasing prices of the 5-area fed-steer to $90. That would mean the actual ending value has fallen to less than the coverage price of $95.25, which would trigger an indemnity payment to the producer. Calculating the indemnity due to the producer is relatively simple.

indemnity amount = number of head x target weight x (coverage price – actual ending value) x insured share

Because we know the producer purchased Livestock Risk Protection for 100 head at a target weight of 11 hundredweight at an insured share of 100 percent, we can now plug in the difference between the coverage price of $95.25 and the actual ending price of $90. Doing so results in an indemnity payment of $5,775, an amount that is $2,304 more than what the producer paid for the policy. The net indemnity to the producer would be $2,304.

We can also look at what would have happened to a producer who purchased coverage for the same number of animals long before any COVID-19 market ramifications could have been imagined. Using the Risk Management Agency website again, we can look at a policy that would have been purchased Jan. 2, and view an endorsement length of 17 weeks, which would have expired April 30 during market reduced prices for fed cattle. In looking at the data we can see how the actual value changed through time and view how the indemnity payment developed through that same time period, Figure 1.

As of Jan. 2 the expected end value for fed cattle was $125.88. At a 99.45 percent coverage level, the coverage price was $125.18. For an endorsement length of 17 weeks the final end date was April 30 and the actual end value was $102.63. Using the same 100 of head of cattle in our previous example the insured value is $137,698, resulting in a producer premium of $4,110. A producer who purchased that specific coverage Jan. 2 would receive an indemnity of $24,805; the net indemnity would be $20,695.

Livestock Risk Protection changing

The USDA announced June 9 improvements to Livestock Risk Protection to make the policies more usable and affordable for livestock producers. One change is to allow premiums to be paid at the end of the endorsement period as opposed to the purchase date, bringing Livestock Risk Protection more in line with other insurance policies. Another change to the program is to increase the premium subsidy for coverage levels of more than 80 percent. Those with an 80 percent or more coverage level will receive a 5-percentage-point subsidy increase, making those increased coverage levels more affordable for producers. Figure 2 shows the previous subsidy levels as well as the new changes.

Conclusion

Livestock Risk Protection insurance is a valuable risk-management tool available to livestock producers throughout the year. Producers buy Livestock Risk Protection insurance from approved insurance providers, with coverage prices ranging from 70 percent to 100 percent of the expected ending value of their animals. At the end of the insurance period, if the actual ending value is less than the coverage price producers will be paid an indemnity for the difference. The USDA’s Risk Management Agency recently announced changes to the program, including moving premium due dates to the end of the endorsement period and increasing premium subsidies to assist producers.

Visit www.fb.org/market-intel and www.rma.usda.gov/Information-Tools/Agent-Locator-Page for more information.

Michael Nepveux is an economist with the American Farm Bureau Federation’s Market Intel.