LRP- What You Should Know
What is LRP?
LRP (Livestock Risk Protection) is a federally backed insurance program that we use as a risk management tool to protect against declining prices in feeder cattle, fed cattle, and swine. LRP functions similarly to a subsidized put option, providing protection on a per-head basis. It should be viewed primarily as a safety net rather than a profit-generating tool. Note that it is for price protection only and does not cover things like death or disease.
How does it work?
A producer starts by picking an end date that lines up with when you plan to sell your livestock, then choose a coverage price; essentially the floor price you want to protect. When that end date arrives, the risk management agency looks at the regional or national cash price average for your livestock type. If that market price has fallen below your coverage price, you receive an indemnity payment for the difference. Importantly, what you actually sold your animals for doesn't factor in, the payout is based entirely on the cash index settlement prices, not your personal sale price.
How do I get covered?
You can purchase endorsements on most business days throughout the year. Insurance periods run anywhere from 13 to 52 weeks, so you can align coverage with your marketing timeline.Offers begin at 3:30 PM and end at 8:25 AM the following day. If they pull pricing for the day due to being limit up or down, or when the cattle on feed report comes out, rates are simply not available that day. The federal government subsidizes between 35–55% of your premium depending on the coverage level you choose. You don't pay anything upfront as premiums are billed at the end of the coverage period. If you already participate in LRP and are considering a change in representation, June is the only month you can switch agents.
Who qualifies for LRP?
LRP coverage is available to nearly any producer in the U.S. with an ownership stake in eligible cattle or swine, no matter the size of the operation. To qualify, you must be eligible for federal programs, have current conservation compliance on file with the FSA, and maintain a valid interest in the livestock. Beginning and veteran farmers may even receive a higher subsidy rate than the typical 35–55% range. Disqualifications are generally limited to past federal violations or failing to meet specific weight and type requirements. For most ranchers, if your FSA paperwork is current and you own the animals, the qualification process is straightforward.
LRP vs Other Tools
LRP is a useful middle ground. Unlike futures contracts there are no brokerage fees or margin calls. Unlike forward contracts you will still benefit if prices rise- you are only protected on the downside and not locked into a fixed price. LRP is cheaper due to the federal subsidies than a similar put option. The tradeoff is less flexibility in strike price than options. Since LRP settles vs the cash index, when the basis is positive, LRP has a lower chance of generating a payment than a traditional put option. LRP performs best in weak cash basis environments.
New updates to the Program
Forward contracted cattle can now be insured under LRP before you physically have them in hand, as long as you can provide the purchase agreement and proof of delivery.
Dairy cull cows are now an insurable category under fed cattle, though limited to 13-week endorsements.
Unborn beef/dairy cross calves can now be covered, provided they're sold within two weeks of birth.
A drought exemption was added for feeder cattle producers who can't deliver due to drought conditions, based on the USDA Drought Monitor index.
The termination date was pushed back to September 30, giving producers more time to wrap up paperwork.
If you would like to know more about LRP, please fill out the form below and we will reach out!