Cattle producers can use Livestock Risk Protection (LRP) to guard against lower calf prices this fall, says Matthew Diersen, SDSU Extension Risk/Business Management Specialist.
"LRP for calves works well for cattle producers because a specific number of head can be insured," Diersen said. "In addition, there is a fixed basis adjustment for calves that offers better protection than when using futures or options contracts."
Given the risk in the market and it’s relatively low cost to manage has Diersen encouraging livestock producers to consider the coverage.
"The cost to transfer the volatility is less than at any time in the past five years," he said. "The trend is for volatility to increase in the coming months before declining in late summer. Ideally, producers would time the purchase of LRP to when cattle prices are seasonally high and before volatility increases."
In mid-April LRP was available with end dates that stretched into January of 2014. Although the floor prices available right now are not as good as in recent years, Diersen explains that LRP leaves the upside open.
"Thus, a producer can still benefit if calf prices are higher this fall than currently expected," he said. "The risk covered by LRP has been significant in recent years. Even with deductibles, LRP had a loss ratio above 1.0 in 2008, 2009 and 2012. Thus, producers received back more in indemnity payments than the cost of the premiums."
As of mid-April, South Dakota producers had insured 31,821 head of feeder cattle through the fiscal year that ends in June. That compares to the nationwide total of 106,370-head insured.
"South Dakota has more insured than any other state – a position held on feeder cattle annually since fiscal year 2008," Diersen said.
To learn more, read "Insuring Calves Using Livestock Risk Protection," a document written by Diersen and published online at igrow.org/up/resources/02-2006-2013.pdf.