February 07, 2024
USDA Livestock Insurance: A Game Changer in Risk Management
Livestock producers around the country have increased their use of government-sponsored livestock insurance in recent years. Livestock Risk Protection Insurance (LRP) is an insurance product designed to protect against a decline in market price.
Livestock Gross Margin Insurance (LGM) for Swine provides protection against the loss of gross margin of hogs (market value of livestock minus feed costs).
Both programs have been in existence since 2003 but modifications to the programs have increased their usage over the past several years. Today, they serve as an important tool in many producers’ risk management arsenal. During the most recently completed crop year that ended June 30, 2023, more than 14 million pigs were protected with LGM and more than 22 million head of swine were protected with LRP for the insurance period.
Figure 1. Livestock Insurance Program Participation by Crop Year
The use cases for the programs are relatively straightforward as coverage level for LRP insurance quotes are customizable and LRP Insurance prices are usually cost effective. LGM is offered once per week and LRP is offered nearly day to day. LRP provides protection against lower prices while allowing for the retention of upside opportunity and is generally cheaper than an exchange-traded put with a similar price floor and coverage length because of the premium cost subsidy.
LRP Coverage Price
Livestock producers who use LRP also have the opportunity to layer into relatively cheap coverage below where the market is currently trading. This allows for major market disruption insurance at a subsidized price level should a catastrophic event send the markets tumbling lower.
Hog producers also rely on LRP to manage basis risk and actually reduce basis risk. For example, LRP-Swine settles to the Lean Hog Index (LHI). The Chicago Mercantile Exchange Group offers 8 futures contracts per calendar year, 7 of which are primarily used by market participants. As such, there are gaps in the year during which there are approximately 60 days between futures expiration dates (mid-December through mid-February time period, for example). Since LRP settles against the LHI as opposed to futures prices, this makes LRP particularly beneficial when this gap in futures contracts coincides with seasonally weak basis levels, such as the end of the year. LRP could also significantly reduce basis risk for animals based off the LHI or if the price discovery for the pigs is very similar.
LRP could be an excellent choice in risk management tools for someone who is looking to establish cash flow-friendly, cost-effective coverage. The endorsements establish a level of protection while maintaining opportunity to the upside should the market move higher. Even better, it could help with basis risk along the way.
The sign-up process for livestock insurance is simple and program costs are uniform across all agencies. The value the agent brings is their knowledge, tools, and approach to implementing the tool to suit the producer’s unique risk management needs and profitability goals.
We at CIH have created a suite of price risk tools, like our LRP Insurance calculator and daily coverage report, on our website to help our clients navigate the decision-making process and determine optimal uses from risk tolerance, marketing, and timing perspectives. Contact us with any questions about how livestock insurance may fit into your swine risk management approach.
Read More on Livestock Insurance:
Livestock Price Insurance – the Do’s and the Don’ts