Parsons: Cattle producers may want to consider ways to manage risk
With declining cattle markets and unpredictable weather, producers may want to look into purchasing some risk management coverage.
Risk management is about protecting value, as well as creating value, and gives producers a way to protect themselves against market volatility, according to Jay Parsons, an ag biosystems economist with the University of Nebraska-Lincoln (UNL).
“One of my favorite quotes is from Christopher Mandel of Sedgwick, Inc., who said, ‘Risk management should be viewed as a priority and a competitive advantage,’” Parsons tells cattle producers. “When times are tight, there is not a lot of protection producers can do because they are already at the bottom of the price cycle.”
In production agriculture, producers can either avoid risk or accept it.
Although producers can’t control the probability of the markets going up or down, they can partake in some pricing strategies to control the impact it has on their operations. They can also choose to transfer risk outside the business by contracting it or purchasing insurance, Parsons says.
In the last seven years, Federal Crop Insurance, which governs programs like the Risk Management Agency (RMA), has made more information available to producers.
They also issue a profile for each state, which producers can access through their website.
Cattle producers can purchase annual forage insurance or pasture insurance for rangeland and forage. Parsons says these programs are pasture, rainfall and forage insurance programs (PRF) that are based on precipitation.
Physical areas are divided into grids, and historical data for each grid is collected and used to determine the expected index value for either precipitation or vegetation greenness, Parsons explains.
“The expected grid index is compared to the final grid index. Producers may receive an indemnity if the actual final index falls below the trigger grid index, which is adjusted based on the coverage level,” he adds.
The annual forage insurance plan provides coverage for annual crops used for livestock feed, including grazing, haying or a combination of the two, grain and grazing, green chop, green chop and grazing, and silage.
The program is similar to PRF and covers fall-planted forages or spring-planted forages. Parsons says it is based on two-month rainfall index intervals, with coverage up to 90 percent of normal precipitation.
Livestock forage disaster
The 2014 Farm Bill also permanently authorized the Livestock Forage Disaster Program (LFP), which authorizes “eligible producers for financial assistance when pasture or rangeland under their control has been classified by the U.S. Drought Monitor as being in a county under a qualifying drought-related event,” Parsons says. “Assistance provided during periods of the drought under the LFP make payments equal to 60 percent of the monthly feed cost for up to five months.”
With all the variations and opportunities available, Parsons recommends producers use the RMA website for more information or seek out a knowledgeable Federal Crop Insurance agent.
“If producers are going to use this product, make sure they are an informed consumer,” encourages Aaron Berger, UNL extension specialist.
Producers can also purchase Livestock Risk Protection (LRP) insurance from RMA that offers price protection for feeder cattle.
“It does not cover sickness or death of the cattle or insure against possible rising feed costs,” according to UNL Ag Economics Extension Educator Jim Jansen. “LRP insurance works similar to how a put option does, and it is slightly subsidized.”
Producers can purchase this insurance as protection against price declines. It is offered for insurance periods varying from 13-, 17-, 21-, 26-, 30-, 34-, 39-, 43-, 47- or 52-week periods based on when producers will market their cattle or the cattle reach their desired weight.
The insurance is available for calves, including steers and heifers. Producers can also obtain coverage for predominantly Brahman cattle and predominantly dairy cattle. Two weight ranges are available – under 600 pounds and 600 to 900 pounds.
An advantage of this product, according to Jansen, is producers can access the website daily to view what expected end value is predicted based on the end of the insurance period. The RMA website updates this information daily for each specific type and weight of feeder cattle, he notes.
The LRP insurance has different coverage prices and levels, varying from 70 to 100 percent of the expected end value.
“The actual end value is based on the cash settled Chicago Mercantile Exchange (CME) feeder cattle index on the end date of the insurance period,” Jansen says. “It is adjusted by RMA for feeder cattle type and weight. RMA also provides a 13 percent subsidy on LRP feeder cattle.”
LRP insurance is available through livestock insurance agents, Jansen continues. Premium rates, coverage rates and actual ending values are updated daily on the RMA website.
Gayle Smith is a correspondent for the Wyoming Livestock Roundup. Send comments on this article to firstname.lastname@example.org.