Livestock Insurance
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Transcript Livestock Insurance
ECON 337:
Agricultural Marketing
Lee Schulz
Assistant Professor
[email protected]
515-294-3356
Econ 337, Spring 2013
Chad Hart
Associate Professor
[email protected]
515-294-9911
Livestock Price Risk Tools
Livestock Futures and Options
Livestock Revenue Insurance
Livestock Revenue Protection (LRP)
Livestock Gross Margin (LGM)
http://www.rma.usda.gov/livestock/
Factsheets
Premium calculator
http://www.extension.iastate.edu/agdm/ldcostsreturns.html
Econ 337, Spring 2013
Livestock Risk Protection (LRP)
Price risk insurance coverage for hogs, fed
cattle, feeder cattle, and lamb
Insurance protects against low livestock
prices
70% to 100% guarantees available for
cattle and hogs, based on CME futures
prices
Econ 337, Spring 2013
Livestock Risk Protection
Coverage is available for up to 26 weeks
for hogs and 52 weeks for cattle
Works sort of like a put option
Premiums are subsidized, the government
pays 13% of the premium
Econ 337, Spring 2013
Livestock Risk Protection
Guarantees available are posted at:
http://www3.rma.usda.gov/apps/livestock_reports/
Posted after the CME closes each day
until 9:00 am Central Time the next
working day
Assures that guarantees reflect the most
recent market movements
Econ 337, Spring 2013
LRP Example
Econ 337, Spring 2013
http://www.extension.iastate.edu/agdm/livestock/pdf/b1-50.pdf
LRP vs. Futures/Options
Futures and options have fixed contract
sizes
Hogs: 400 cwt. or about 150 head
Fed cattle: 400 cwt. or about 32 head
Feeder cattle: 500 cwt., 60-100 head
LRP can be purchased for any number of
head or weight
Econ 337, Spring 2013
LRP vs. Futures/Options
Futures hedge or options can be
offset at any time before the
contract expires
LRP can not be offset, once you
buy the coverage, you’re locked
in
Econ 337, Spring 2013
Livestock Gross Margin (LGM)
Insures a “margin” between revenue and cost
of major inputs for cattle, hogs, and dairy
Protects against decreases in cattle/hog prices
and/or increases in input costs
Hogs
Value of hog – corn and soybean meal costs
Cattle
Value of cattle – feeder cattle and corn costs
We talked about dairy earlier in the semester
Econ 337, Spring 2013
Livestock Gross Margin
Cattle (coverage for up to a year out)
Calves
Yearlings
Hogs (coverage for up to 6 months out)
Farrow to finish
Finishing feeder pig
Finishing SEW pig
Econ 337, Spring 2013
LGM Guarantees for Hogs
Farrow to Finish
Gross margin per hogt =
2.6*0.74*Lean Hog Pricet - 12 bu. * Corn Pricet-3
- (138.55 lb./2000 lb.) * SoyMeal Pricet-3
Finishing
Gross margin per hogt =
2.6*0.74*Lean Hog Pricet - 9 bu. * Corn Pricet-2
- (82 lb./2000 lb.) * SoyMeal Pricet-2
SEW
Gross margin per hogt =
2.6*0.74*Lean Hog Pricet – 9.05 bu. * Corn Pricet-2
- (91 lb./2000 lb.) * SoyMeal Pricet-2
Econ 337, Spring 2013
LGM Guarantees for Cattle
Yearlings
Gross margin per headt =
12.5*Live Cattle Pricet – 7.5*Feeder Cattle Pricet-5
- 50 bu. * Corn Pricet-2
Calves
Gross margin per headt =
11.5*Live Cattle Pricet – 5.5*Feeder Cattle Pricet-8
- 52 bu. * Corn Pricet-4
Econ 337, Spring 2013
Livestock Gross Margin
Has deductibles, like car or home
insurance
For cattle, deductibles from $0 to $150
per head by $10 increments
For hogs, deductibles from $0 to $20 per
head by $2 increments
Example premiums available at:
http://www.iaii.us/
Econ 337, Spring 2013
LGM-Swine Farrow-to-Finish,
Feb. 2012
April
May
June
July
August
Gross
Margin
$78.74
$93.20
$91.74
$91.59
$90.59
Lean Hog
Price
$89.88
$98.83
$99.57
$99.66
$99.25
Corn Price
$6.05
$6.22
$6.40
$6.42
$6.43
Soybean
Meal Price
$311.70
$322.15
$332.60
$333.85
$335.10
Econ 337, Spring 2013
LGM Example
Say we insure 100 hogs in April and
choose a $2 deductible
Our LGM policy is protecting us against
gross margins below $76.74 per head
When April comes, the insurance
company will compute the actual margin
using the same formula as was used for
the guarantee
Econ 337, Spring 2013
LGM Example
If the lean hog price fell to $88 per cwt., the
corn price fell $6.00 per bu., and the soybean
meal price stayed at $311.70 per ton, then the
actual gross margin is
Actual gross margin per hogt =
2.6*0.74*$88 - 12 bu. * $6.00 - (138.55 lb./2000 lb.) * $311.70
= $75.72 per head
Per head indemnity = $76.74 - $75.72 = $1.02
Econ 337, Spring 2013
LGM Issues
Only available on the last business
Friday of the month
Is a complicated insurance policy
Works like an Asian basket option
Asian = uses a price average
Basket = covers more than one commodity
Like a put on cattle/hogs and calls on feeder
cattle, corn, and soybean meal
Econ 337, Spring 2013
Who can benefit from
LGM/LRP?
Producers who depend on the daily cash
market or a formula related to it.
Producers with low cash reserves.
Smaller producers who do not have the
volume to use futures contracts or put
options.
Producers who prefer insurance to the
futures market. No margin account.
Econ 337, Spring 2013
Some Risks Remain
LRP, LGM do not insure against
production risks
Futures prices and cash index prices
may differ from local cash prices
(basis risk)
Selling weights and dates may differ
from the guarantees
Econ 337, Spring 2013
Class web site:
http://www.econ.iastate.edu/~chart/Classes/econ337/
Spring2013/
Remember, exam due on Tuesday.
Econ 337, Spring 2013