Implications of Livestock Risk Protection Subsidy Rate Changes for Feeder Cattle

Price risk is a primary source of risk for cattle producers. Larger cattle operations have traditionally managed this risk using futures and options contracts. However, futures and options contracts are traded in 50,000-pound increments, which makes these tools inefficient for producers marketing less than 50,000-pounds at one time. An alternative for managing price risk is Livestock Risk Protection insurance (LRP). LRP can be used to manage price risk on as few as one animal, and it pays policyholders at the time of policy expiration if a cash price index is lower than the insured price, which is set when the policy is purchased. LRP is flexible in that several coverage levels and endorsement lengths (period) are available each day. Premiums for LRP increase as coverage level (coverage price) and endorsement length (number of weeks in the future in which to insure a price) increase. Coverage levels range from 70 to 100 percent of the expected ending value and when multiplied by the expected ending value, result in the coverage price. For more specifics on LRP, please refer to Griffith, 2021. When the LRP program was initiated, insurance premiums received a 13 percent subsidy. Nonetheless, at this subsidy rate, LRP policies were expensive and would only pay indemnities when prices would rapidly decline in a short period (Merritt et al. 2017). Subsidy rates were increased in both 2019 and 2020. The new subsidy rate structure is a 35 percent subsidy for a coverage level between 95 and 100 percent, 40 percent for coverage between 90 and 94.99 percent, 45 percent for coverage between 85 and 89.99 percent, 50 percent for coverage between 80 and 84.99 percent, and 55 percent for coverage between 70 and 79.99 percent (USDA RMA, 2021a). The objective of this research was to determine the impact of the 2020 LRP subsidy rate change on price protection for feeder cattle, and determine the probability of the LRP insured price being greater than the actual ending price (e.g., an indemnity being paid). These results could help cow-calf and stocker producers identify the contract that best fits their needs.