Economic Tidbits

Changes Improve LRP

The USDA Risk Management Agency (RMA) in June announced changes to the Livestock Risk Management Protection (LRP) insurance program. The changes became effective July 1. LRP, available for feeder cattle, fed cattle, swine, and lambs, is designed to insure against price declines. Producers can purchase a variety of coverage levels and insurance periods to match their operations and marketing timetables. When actual prices fall below the coverage price an indemnity for the difference is paid.

RMA’s goal with the changes is to make LRP more usable and affordable for producers. Under the changes, producers can pay premiums at the end of the endorsement period rather than on the purchase date. Also, coverage levels above 80 percent receive a 5-percentage point bump in subsidy levels. For example, for a coverage level of 95 percent, the subsidy increases from 20 percent to 25 percent. The subsidy remains at 35 percent for coverage levels less than 80 percent. More information on LRP can be found at RMA website: https://www.rma.usda.gov/Policy-and-Procedure/Insurance-Plans/Livestock-Insurance-Plans.

Research at the University of Nebraska-Lincoln (UNL) has shown LRP can be an effective risk management tool for both feeder and fed cattle. Jay Parson and Jim Jansen of the Dept. of Agricultural Economics analyzed the effectiveness of LRP cattle products between 2008 and 2017 for feeder and fed cattle. They found the indemnity ratio for four feeder cattle products was 1.33 over the 10-year period, meaning for each $1.00 in premium, $1.33 in indemnities were paid. However, indemnities were not paid in all years. The same analysis for coverage on steers and heifers of greater than 900 pounds resulted in an indemnity ratio was $1.08. For more information on the analysis, go to: https://www.morningagclips.com/lrp-insurance-performance-2008-2017/.

The RMA wants to make LRP more useful for producers. The UNL analysis shows LRP can be an effective risk management tool, but it doesn’t mean LRP is the right choice for every cattle producer. It does suggest, though, that livestock producers should investigate LRP as a possible risk management tool for their operations.

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