LRP: Is Opportunity Knocking on Your Door?

The Livestock Risk Protection (LRP) program can be described as a subsidized put option protecting the price of cattle against a general market downturn. LRP coverages are based on the CME Futures Market and sold on a per head basis. Coverage prices and premiums change daily based on the current market conditions and are calculated based on the animal’s expected ending weight per hundred. Contracts are purchased based on the time frame the producer plans to market their cattle ranging from 13 to 52 weeks. Once the coverage has ended based on the contract ending date, the coverage price is compared against the Feeder Cattle Index for that day. If the selected coverage price is higher than the Index, the LRP coverage pays the difference.
Today’s current cattle markets are giving livestock producers a unique opportunity that is not always present. The current Feeder Cattle Index is telling us that the average 750 pound steer is being sold in the cash markets for around $140/cwt. Meanwhile, the futures are telling us that the same calf should be worth around $157/cwt. This is giving producers a $17 basis. Basis reflects the relationship between cash price and futures price. LRP presents the opportunity to capture this basis. As we move forward, one of following these things must happen:
-Cash price increases to the futures price
-Futures price decreases to the cash price
-A combination of both
Much like grain producers who are looking to capture basis when they market, we believe livestock producers should be doing the same. LRP is a tool that allows you to take advantage of positive basis in the market.
A producer must ask themselves some key questions to know when the right time is to purchase LRP. When will my cattle be ready to market? What price do I need to market at to be profitable and how does that relate to the futures? Are there reasons why the cash market will move between now and then? If it were to move, which way would it most likely move? There are a multitude of factors that could affect the direction of the cash market, ranging from economic, political, to even societal pressures, like the current expansion of “fake” meat products.
We highly encourage producers, especially cow-calf operators, to begin keeping a casual eye on the markets once their calves start hitting the ground. LRP contract lengths range from 13 to 52 weeks. By looking at coverage options early you allow yourself the best opportunity to put your operation in a profitable situation.
We encourage stocker/backgrounding operators to use the LRP calculator on our website. By answering a few simple questions, the calculator will give producers an idea of their break-even price and if there are any potential profits to be had based on the coverage levels available.
LRP is a simple tool to use and it’s very easy to obtain the coverage. I have used this product for over 10 years on my operation and it gives me the peace of mind that I don’t have to time the markets. As we have seen over the past year the cattle markets can easily be affected by things within and outside of the ag industry. LRP is a safety net that protects your operation from general market uncertainty. Contact our office to learn how LRP can benefit your operation.

Leave a reply

Your email address will not be published. Required fields are marked *