Financial risk tools for livestock

by Sally Colby

Farmers know raising livestock comes with risk. Factors such as weather, consumer preferences, market prices and the ripple effect of domestic and international incidents can seriously impact bottom lines.

Jack Field, risk advisor for CKP Insurance, explained federal insurance options for those who raise livestock and/or hay crops. Such products are offered through the Risk Management Agency (RMA), the insurance arm of the USDA, and are available to producers throughout the U.S.

The Pasture Range and Forage Program (PRF) provides insurance coverage on pasture, rangeland or forage acreage grown for the purpose of grazing livestock or haymaking. This program allows livestock graziers and hay producers (irrigated and non-irrigated) to purchase insurance against reduced precipitation. Insurance protection covers losses incurred by increased feed costs, livestock depopulation or other issues resulting from inadequate rainfall.

Although the program is sometimes referred to as “drought insurance,” Field said that term is inaccurate because the program doesn’t require drought to trigger a payment. It instead uses a rainfall index and grid system to delineate areas across the nation.

“The program uses NOAA [National Oceanic Atmospheric Administration] data with USDA data,” Field explained. “The USDA uses the actual precipitation data from NOAA and compares it to a 74-year average of precipitation data. The program has a great deal of flexibility. Producers can select coverage throughout the entire year or time coverage during specific times when precipitation is critical to their operation.”

A livestock owner who plans to put livestock on pasture in late April or May can elect to have coverage in February and March to cover adequate precipitation for grass. Producers can select periods of time for coverage or look back historically and see when precipitation is lower than the historic average.

The PRF program allows producers to select a variety of different coverage levels (the amount of precipitation required to fall). If less than the coverage level is reported during an interval, a loss is triggered. Payments to producers are determined by the NOAA data for grid location and index intervals the farmer chooses to insure.

“This is the only program available to livestock producers (irrigated and non-irrigated), as well as hay growers (irrigated and non-irrigated), to protect their operations against the negative impacts of reduced precipitation,” said Field. “The PRF program is timely in payments to producers. If there is a loss during the year, it takes 60 to 75 days from the time of the end of the interval for a payment to be rendered.”

The PRF program doesn’t require an adjuster and there are no claims to sign – claims are paid automatically based upon NOAA precipitation totals in each grid. The program gives producers the ability to sign up for coverage for an entire year beginning Jan. 1 and ending Dec. 31 without having to pay the premium until Oct. 1 of the crop year. This allows producers ample time to plan ahead to pay the premium and it provides coverage without tying up capital in a premium. Payment can be used as necessary for purchasing forage or hay, renting additional pasture or making repairs.

Some of the base requirements for PRF include proof of livestock ownership and identifying the farmed land location (owned and/or leased) through FSA. Applicants must complete FSA form AD1026 (conservation compliance form) to ensure highly erodible soil or draining wetlands are not being farmed. There is an additional PRF subsidy available for veteran and beginning farmers.

The Livestock Risk Protection Program (LRP) is a price protection program that’s been in place for about 15 years. Although the program is most often used for feeder cattle and fed cattle, coverage is also available for swine and sheep. The concept of LRP is to protect against price declines; it doesn’t protect against mortality, condemnation at the plant, physical damage, disease, marketing decisions, local price abnormalities or any other production risk.

For cattle, the LRP uses the Chicago Mercantile Exchange (CME) to provide price coverage for feeder cattle and fed cattle. Cattle are categorized by type: heifers, steers, unborn heifers and steers, predominantly dairy and unborn predominately dairy.

Field explained the feeder cattle LRP: “Each day there is trade [on the CME], the RMA generates premium rates and ending values and posts those online. Once those become available, producers have the ability to purchase coverage.” He added that the window for coverage is fairly narrow – rates come out in the afternoon and farmers have until the following day to purchase coverage. If coverage isn’t purchased within the allotted time, the system is locked until the next trading day, so farmers must follow the market and act quickly.

The basis for LRP is the CME Feeder Index, a seven-day rolling average that considers medium steers and number one and two steers in 50-pound increments from 700 to 900 pounds. The average determines the overall index which changes from day to day. “The index is then used to determine the end values for cattle,” said Field. “The program gives producers a safe way to provide price protection without margin calls or other fees.” The LRP premium isn’t due until the end of the endorsement, which means farmers can get price protection without tying up capital and will know what the premium will be and when it’s due. Field added that the program is flexible and producers are not required to purchase the highest coverage level.

“The actual sales price of cattle has nothing to do with whether or not there is a loss,” said Field. “Once you select a coverage price, you’re waiting to see the final CME index. If the index is less than your coverage price, that will trigger a loss.”

The Livestock Indemnity Program (LIP) allows livestock producers to seek an indemnity against a natural disaster such as adverse weather including floods, blizzards and heat as well as attacks by animals reintroduced into the wild by the federal government. “One of the most important things about LIP is that producers notify their county office as soon as possible after a loss,” said Field. “You may not receive payment on 100% of animals lost because there is an assumed death loss built into the program.” Field said the program is good, although payments may take a while. He suggested farmers follow up with their FSA office to check on the status of a claim.

As with any insurance product, it’s important to seek preliminary information from a reputable, experienced company familiar with the farming region, then work with an individual who can provide guidance that suits the unique characteristics of your farming operation.

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