The Oklahoma State University Agricultural Economics Department recently hosted the Rural Economic Outlook Conference. University of Kentucky Extension Professor in Livestock Economics Kenny Burdine was a keynote speaker there, and Oklahoma Farm Report’s Maci Carter caught up with him to talk about the mechanics of Livestock Risk Protection for feeder cattle. Ron Hays is featuring Burdine’s comments in today’s BeefBuzz.
Burdine explained LRP as an index insurance product triggered by the CME feeder cattle index, which is a seven-day weighted average of feeder cattle prices in twelve major states.
“You aren’t insuring the value of your cattle,” he said. “You are buying an insurance policy that pays you if that CME index falls below the threshold that you chose. So, if the CME index, which is actual feeder cattle sales, drops by fifteen or twenty bucks per hundredweight, although your cattle may not sell at the same amount, you can use LRP to protect yourself against major market movements.”
Burdine said that the biggest advantages of LRP over put options are the lower cost of premiums and more flexibility in the number of cattle that can be covered.
“The thing to be aware of that might be less attractive about LRP versus the put option is that it isn’t quite as flexible,” Burdine cautioned. “Every policy has a beginning and ending date, so buying LRP is a little bit like buying a put option that can only be exercised at expiration. So, for indemnification purposes in LRP, the only date that matters is the ending of the policy.”
When deciding which option is best for them, Burdine advised producers to create a budget to get a feel for how the expected sale price will impact their profit level. He said, “Sometimes, that answers the question for them. They may choose a coverage level that ensures them to at least break even or cover a bank loan or something like that. At the same time, you have to think about your leverage level. Newer or younger producers that are more highly leveraged, probably have to choose higher coverage which means spending more on the premium because they can’t afford as much downside risk.”
Overall, Burdine feels that LRP is a good risk management tool to help producers be proactive in their planning. “LRP may not be part of your plan, but thinking through how you would deal with downside risk and putting a plan in place to manage it is probably the best strategy,” he concluded.
The Beef Buzz is a regular feature heard on radio stations around the region on the Radio Oklahoma Ag Network and is a regular audio feature found on this website as well. Click on the LISTEN BAR at the top of the story for today’s show and check out our archives for older Beef Buzz shows covering the gamut of the beef cattle industry today.
