By Andi Anderson
Livestock Risk Protection (LRP) is a popular program that helps livestock producers transfer downside price risk to others. The program has become increasingly popular in recent years, with the number of head covered increasing from fewer than 80,000 in fiscal year 2020 to almost 4.2 million in fiscal year 2023.
The sharp increase in LRP sales is primarily due to the subsidy on premiums, which was substantially increased a few years ago. Hedges using futures or put options would be more expensive, and LRP premiums are paid for at the end of the coverage period, making it a more attractive option for producers.
The LRP subsidy is the highest for the lowest levels of coverage, which implies that buyers of LRP are buying a little more coverage than before. The total subsidy for fed and feeder cattle in 2023 was over $110 million, while producers paid about twice that amount for the coverage. However, indemnity payments were low for feeder cattle and zero for fed cattle, as cattle prices steadily increased during most of that time.
Producers need to remember that LRP is a downside protection tool, and when it is paying out, cattle prices have likely fallen. They should use LRP in conjunction with other risk management tools, such as diversification and marketing plans, to develop a comprehensive risk management strategy.
Producers should also be aware of the subsidy structure for LRP. The subsidy is the highest for the lowest levels of coverage, so producers should carefully consider the amount of coverage they need before purchasing an LRP policy.
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Categories: Ohio, Livestock