Livestock price insurance: Do's and don'ts

As we have written many times in this space, Livestock Risk Protection has become an integral part of many livestock producers’ risk management toolbox in recent years. The program is intended to protect farmers from unexpected price declines in the CME Lean Hog Index with customizable end dates, coverage levels and number of animals per endorsement. The reasons behind the dramatic uptick in LRP participation are straightforward.

Modifications over the past several years to increase head limits, increase subsidy levels and change the premium due date to help with cash flow needs have all been made with the producers’ best interests in mind. We have witnessed increased participation from producers, both large and small, over the past four crop years.

The LRP crop year runs from July 1 through June 30 and this uptick can be viewed over the past four completed crop years below:

Through attending industry events and engaging with producers from around the country, one theme has been very clear—LRP has been a godsend for producers of all sizes during what has been a very difficult time for pig farmers. The level and duration of losses in the pork sector are unlike anything we have experienced since 1998 (and by some measures, it has been worse). According to Iowa State University’s Estimated Livestock Returns, returns for the 12-month period ending in December 2023 for farrow-to-finish operations were the worst since at least 2002.

LRP is available up to 52 weeks in advance of hogs being marketed. Many producers of all sizes are receiving indemnity payments today when the lean hog index is below the cost of production because they were able to implement LRP coverage up to a year ago when available expected ending values and coverage prices were much higher. Without access to subsidized price protection, the margin environment over the past year would have been much tougher to stomach. It is not hyperbole to suggest LRP has helped some producers stay in business over this period, preventing the ripple effects of economic hardship throughout the rural communities where they are located.

Oftentimes, LRP is thought of as similar to an exchange-traded put option. A put option provides a price floor while allowing for the retention of upside opportunity. While both LRP and put options provide a form of price protection, they are fundamentally different products with different mechanics. At times, LRP premiums (the amount a producer must pay for the protection) may be less expensive than put options at similar coverage levels and coverage length because the of the premium subsidy.